Myers v. Eich

#23837-rev & rem-JKK

2006 SD 69

IN THE SUPREME COURT
OF THE
STATE OF SOUTH DAKOTA

* * * *

WILLIAM G. MYERS, TRUSTEE
WILLIAM G. MYERS, LIVING TRUST,
DATED 11-25-94, Plaintiff and Appellee,

v.

MICHAEL R. EICH and
SHERI L. EICH, Defendants and Appellants.

* * * *

APPEAL FROM THE CIRCUIT COURT OF
THE THIRD JUDICIAL CIRCUIT
MOODY COUNTY, SOUTH DAKOTA

* * * *

HONORABLE DAVID R. GIENAPP
Judge

* * * *

ROGER W. HUNT of
Hunt Law Office Attorney for plaintiff
Brandon, South Dakota and appellee.

THOMAS K. WILKA of
Hagen, Wilka & Archer, P.C. Attorneys for defendants
Sioux Falls, South Dakota and appellants.

* * * *

ARGUED ON MAY 24, 2006

OPINION FILED 07/26/06
#23837

KONENKAMP, Justice

[¶1.] In 1999, William Myers advanced Michael and Sheri Eich $125,000 to

redeem their property from foreclosure. The transaction between the parties

included a warranty deed and contemporaneous contract for deed. Over the next

several years, Myers continued to advance the Eichs money. With one advance,

Myers amended the 1999 contract for deed; with another, he had the Eichs execute

new warranty deeds. The Eichs, however, could not get ahead and became

delinquent on their obligation. Ultimately, Myers informed them that he was going

to sell the property. He then brought a forcible entry and detainer action, alleging

that he was the fee simple owner of the property and the Eichs were leasing the

premises from him. The Eichs, however, asserted that an equitable mortgage

existed and Myers was required to proceed by a foreclosure action. The circuit court

agreed with Myers and the Eichs appeal. Because the initial transaction bears the

central earmarks of an equitable mortgage and should have been so construed, and

nothing in the subsequent actions changed the character of the initial transaction,

the circuit court abused its discretion in concluding otherwise. We reverse and

remand.

Background

[¶2.] Since 1980, Michael and Sheri Eich lived on sixty-four acres they

owned in Moody County, South Dakota (the home property). In 1995, the Eichs

purchased land next to the home property to operate a truck repair business (the

shop property). After the Eichs purchased the shop property, they gave First Bank

-1-
#23837

of South Dakota a mortgage in 1996 using both the shop and home property as

collateral.

[¶3.] Three years later, the Eichs became delinquent on this mortgage loan

and First Bank foreclosed on both properties. During the Eichs’ redemption period

a broker contacted William Myers believing that he might assist the Eichs.

According to Myers, the broker told him that the Eichs needed $200,000 to redeem

their property but were only able to finance $75,000 through First National Bank of

Brookings. Myers agreed to provide the additional $125,000 through his trust,

William G. Myers Living Trust (WGMLT).

[¶4.] The arrangement between Myers and the Eichs was summarized by

Myers in a letter to the Eichs. The letter was printed on Myers Real Estate

letterhead and was entitled “Instructions to Borrowers.” In the body of the letter,

Myers noted that he was a licensed real estate broker. He then described their

transaction:

WGMLT is lending you $125,000 to acquire your property from
US Bank. In return, you are to repay to WGMLT $135,000.00
plus interest of 14% per annum in monthly payments of
$1,800.04 per month starting on October 1, 1999 for 180
payments. . . . To provide security to WGMLT for this
transaction, WGMLT is purchasing your property above
described as Parcel 1[the home place] for $1.00 and the above
described Parcel 2 [the shop property] from US Bank for
$125,000 plus other funds you are furnishing and then selling
these two parcels to you for $135,000 on a contract-for-deed
(CFD) with 14% interest.

In accord with the letter, Myers prepared and the Eichs signed a warranty deed

dated September 1, 1999, purporting to convey the home and shop properties.

Contemporaneously, Myers executed a contract for deed, whereby he agreed to re-

-2-
#23837

convey both properties to the Eichs upon their payment of $135,000 in monthly

installments of $1,800.04 from October 1, 1999, through September 1, 2014, at a

rate of fourteen percent interest per annum. The $135,000 obligation represented

$125,000, plus a $10,000 fee Myers charged for the advance.

[¶5.] On September 2, 1999, Myers filed the warranty deed with the Moody

County Register of Deeds. In the following month, Myers responded to a

questionnaire from the Moody County Office of Equalization, regarding an annual

assessment to sales ratio. In this questionnaire, he characterized the September 1,

1999 transaction:

This property was in foreclosure and the purchase by [WGMLT]
was followed by a sale to [the Eichs] via contract for deed not yet
filed. This purchase and resale was simply a security vehicle to
secure to WGMLT the money loaned to Eich to redeem the
property from foreclosure. Therefore, none of the information
requested on the form required by SDCL 10-11-54 thru 60 would
be reflective of a true sale or sales price.

The reason the contract for deed was not yet filed, according to Myers, was because

the Eichs “had other debts they wanted to clear up.” The Eichs started making

their monthly payments on September 29, 1999, as required by the contract for

deed. Myers documented the Eichs’ payments in his computer-generated

amortization schedule. He explained that the computer program recorded the

amount of the Eichs’ payments and date received. The program then calculated the

interest paid and principal due after each payment in relation to the total obligation

and interest rate charged.

[¶6.] The amortization schedule reflected that the Eichs continued to make

timely payments from September 1999 until April 2001. In 2001, however, the

-3-
#23837

Eichs began experiencing financial difficulties. They had defaulted on a $25,000

mortgage loan that had been secured through the Farmers Home Administration in

1980 for the home property. Myers agreed to assist them and either paid or

assumed the remaining balance, $40,098.74. Thereafter, Myers created an

amended contract for deed. In the amended contract, Myers noted that “the Eichs

now wish to borrow Forty Thousand Ninety-Eight and 74/100 Dollars ($40,098.74)

to pay off a Real Estate Mortgage dated November 17, 1980 . . . given by [the Eichs],

WROS, to United States of America, acting through the Farmers Home

Administration. . . .” The Eichs signed the amended contract for deed on April 4,

2001, and, on April 24, 2001, Myers recorded this contract along with the original

contract for deed dated September 1, 1999. Both the 1999 contract for deed and the

2001 amended contract for deed related to the same tracts, the home and shop

properties.

[¶7.] With this additional obligation, the new contract for deed increased the

Eichs’ monthly payments to $2,353.56, with the same fourteen percent per annum

interest rate. Beginning in May 2001, the Eichs paid the new monthly amount.

However, in August 2001, the Eichs were again experiencing financial difficulties as

a result of an IRS tax lien. Myers agreed to loan them $21,000. In return, Myers

charged a $1,000 fee and took a lien on the trucks the Eichs owned. This loan was

separate from the arrangement relating to the home and shop properties and was

documented by Myers through a separate amortization schedule. Also, the

circumstances surrounding this loan are not part of this appeal. However, the fact

-4-
#23837

that Myers loaned the Eichs additional money is relevant in understanding the

nature of the parties’ relationship.

[¶8.] Returning to the Eichs’ obligation under the amended contract for

deed, the Eichs made payments from the latter part of 2001 until December 2002.

During all of 2002, however, the amount and timeliness of the payments were

inconsistent and irregular. The Eichs would later recount that Myers accepted

whatever amount they could pay, and in many instances they paid him by

endorsing over company checks. However, the amortization schedules Myers kept

show that although multiple payments were received in January 2002, after that

date no payments were received until June 2002. From June 2002 until December

2002, the Eichs made payments, but the monthly amounts varied.

[¶9.] On January 15, 2003, the amortization schedule shows that Myers

advanced a “loan” of $64,800. According to the Eichs, on January 4, 2003, the First

National Bank of Brookings sent them notice that it was going to foreclose on a

$75,000 mortgage loan they had secured on their property in August 1999. With

foreclosure imminent, Myers agreed to have the remaining obligation assigned to

WGMLT. This arrangement, unlike the previous instance when Myers advanced

the Eichs additional money, did not result in an amended contract for deed.

Instead, Myers presented and the Eichs signed two new warranty deeds. The new

deeds conveyed the same property as the 1999 deed purported to convey and was

filed with the Moody County Register of Deeds on January 15, 2003.

-5-
#23837

[¶10.] The Eichs’ financial difficulties persisted. Myers had not received a

payment from them since December 2002. On March 11, 2003, Myers sent the

Eichs a letter, stating,

I have been studying the two loans you have with us and trying
to come up with some way that you can recover your property
and that I can recover my money. So far I don’t have anything
to offer except as follows.
On the first loan we made to you, after we had paid off the bank
twice, paid off FmHA, paid your back real estate taxes and
insurance, as of 3/15/03 you will owe us $264,625.89.
I don’t know how to get this from you other than to sell the farm
and the shop, and I don’t know if the two of them will bring that
amount. One other thought I have had is that I could rent the
farm and shop to you for a year at $3,500 per month and see if
the picture looks better for you at the end of one year. If we do
that I will have to have the rent each month on time. . . .
I need to know your thoughts on this because, as I am sure you
know, having $291,418.04 out there with no payments coming in
has not put me in a good situation.

The Eichs did not contact Myers in response to this letter, but nonetheless made a

payment on April 2, 2003, of $3,500.

[¶11.] They continued to make monthly payments through May 2004.

However, the amount they paid each month was inconsistent and only equaled

$3,500 one other time. In December 2003, Myers mailed the Eichs a copy of the

amortization schedule along with the following note:

We had agreed that I would get $3,500 per month on the
acreage, the home & the shop. So far this year I have gotten
$17,968.30 or an ave[.] of $1,497.36 per month- vs the $3,500.00
we are suppose to get. So far this year it has cost us $15,542.16
in taxes & insurance to own this property. That is about
$1,295.18 per month. This does not include the $64,800.00 we
paid your bank to save the property nor does it include any
interest on the money we have in these properties. Can you see
why I think there is something wrong with this picture & keep
after you to sell trucks that are not bringing in any money & to
get us PAID?

-6-
#23837

The schedule accurately reflects the advances Myers provided the Eichs, including

certain instances when he paid the Eichs’ real estate taxes and property insurance.

There are other advances on the schedule that Myers later described as expenses he

incurred and not obligations of the Eichs. However, the amortization schedule does

not distinguish between these expenses and the Eichs’ existing obligation, nor does

the record provide clarification.

[¶12.] Nonetheless, after receiving this correspondence, the Eichs paid Myers

in January, February, and March 2004. No further payments were made. As a

result, Myers sent another letter to the Eichs on May 5, 2004. He reminded them

that he “was to get a monthly rent of $3,500 and [the Eichs] were to have one year

in which to arrange purchase of the properties.” Because insufficient payments had

been made, he informed them that he had “no choice but to put the properties on

the market” and he hoped that they could buy them.

[¶13.] According to the Eichs, they tried everything to obtain financing, but

on August 11, 2004, Myers sent them a notice to quit, demanding that they

surrender both the home and shop properties. The Eichs hired an attorney, who

advised them that the solution was to pay Myers for the properties. Consequently,

two purchase agreements were prepared in September 2004. Ultimately, the Eichs

could not secure funding and the transactions were never completed. However,

Mike Eich’s sister paid Myers $202,000 on October 1, 2004, for the home property.

That left the shop property still in question. Myers brought a forcible entry and

detainer action. He sought to evict the Eichs, claiming that he owned the shop

property and the Eichs were merely leasing it from him. The Eichs counterclaimed

-7-
#23837

for a declaration that they owned the shop property because the arrangement was

actually an equitable mortgage.

[¶14.] A trial to the court was held in June 2005. Myers contended that he

was the fee simple owner of the shop property as evidenced by the 1999 and 2003

warranty deeds. He further asserted that because the Eichs did not dispute his

ownership when they drafted the purchase agreements in September 2004, such

failure negated any claim they could now make. Lastly, he argued that by paying

$3,500 in April 2003, the Eichs entered into a one-year lease agreement with him

for the shop property and were in default of that lease.

[¶15.] The Eichs argued that the circumstances surrounding their

relationship support a conclusion that an equitable mortgage existed, similar to the

situation in Adrian v. McKinnie, 2002 SD 10, 639 NW2d 529. Although the Eichs

signed a warranty deed purporting to convey title to Myers in 1999, they insisted

that the purpose was only to secure the funds Myers loaned to them. And the 2003

warranty deeds were executed to provide Myers security for additional loans.

Moreover, the Eichs said that their $3,500 payments did not constitute an

agreement to enter into a lease because they thought that this was the amount

Myers wanted to receive each month. Because they never intended to convey to

Myers absolute title of their properties, and the documents surrounding the

transactions evince a security arrangement, the Eichs sought a finding that an

equitable mortgage existed.

[¶16.] The circuit court entered judgment against the Eichs, ruling that

certain elements established the absence of an equitable mortgage. First, when the

-8-
#23837

Eichs executed the 2003 warranty deeds, they did so because they knew “of their

delinquency and their desire not to have [Myers] foreclose on the contract for deed.”

Second, the March 11, 2003 letter from Myers, “clearly sets forth the lease

proposal,” and by paying $3,500 it was clear that the Eichs understood they were in

a lease arrangement. Third, the Eichs were aware that Myers sold the home

property to Mike Eich’s sister and “no action was taken by them at the time to claim

that [Myers] did not have title since all he had was an equitable mortgage[.]”

Fourth and last, the Eichs initiated purchase agreements through counsel and “if

someone else did not own the property a purchase agreement would not be

necessary.” Based on these considerations the court distinguished Adrian and

entered judgment in favor of Myers for $16,306.28 in back rent on the one-year

lease.

[¶17.] The Eichs appeal, asserting that (1) “the documents comprising the

1999 transaction constitute an equitable mortgage,” and (2) if the documents did not

create an equitable mortgage, “was [Myers] nevertheless required to proceed by a

contract for deed foreclosure action?”

Analysis and Decision

[¶18.] “Because the recharacterization of a document is an equitable remedy,

a court has discretion to grant or deny it. Englehart v. Larson, 1997 SD 84, ¶12,

566 NW2d 152, 155. Our standard of review, therefore, is abuse of discretion.”

Adrian, 2002 SD 10, ¶9, 639 NW2d at 533. Nonetheless, “[i]f facts plainly exist to

warrant equitable relief and no facts exist to disentitle a party to such relief, then a

court is not free simply to ignore the remedy in the name of discretion. Consistency

-9-
#23837

and fairness require courts to decide similar cases similarly.” Id. We review the

circuit court’s findings of fact under the clearly erroneous standard of review. Id. ¶8

n1. Conclusions of law are reviewed de novo. Id.

[¶19.] The Eichs contend that the circuit court’s findings of fact are clearly

erroneous because “the written memorials that surrounded the transaction

illustrate the parties’ intent to enter into a mortgage agreement and not a sale of

property.” Specifically, they maintain that 1999 letter from Myers, entitled

“Instructions to Borrowers,” evinced an intent to create a security arrangement.

The letter stated that WGMLT was “lending” the Eichs $125,000, and explained

that the shop and home properties were “purchased” by WGMLT “to provide

security to WGMLT for the transaction[.]”

[¶20.] Myers, however, insists that the Eichs had no intent “to enter into a

security device of any design.” He claims that “[t]hey simply hoped to stay in

business long enough so they might someday again own the shop property by

buying it from” him. He places particular significance on the fact that the Eichs did

not dispute his ownership when they had an attorney draft purchase agreements in

September 2004, or when he sold the home property to Mike Eich’s sister for

$202,000. With this background, Myers argues that the Eichs are now precluded

from asserting that an equitable mortgage exists.

[¶21.] “Equity requires that the transaction be treated according to its

substance and effect, not its form.” Star Enterprise v. Thomas, 783 FSupp 1564,

1568 (DRI 1992); see also Brenneman Mech. & Elec., Inc. v. First Nat’l Bank of

Logansport, 495 NE2d 233, 239 (IndCtApp 1986); Humble Oil & Refining Co. v.

-10-
#23837

Doerr, 303 A2d 898, 905-06 (NJSuperCtChDv 1973). A purported absolute

conveyance may be recharacterized as a mortgage, depending on the surrounding

circumstances and the parties’ intent. Adrian, 2002 SD 10, ¶11, 639 NW2d at 533;

Abberton v. Stephens, 747 SW2d 334, 336 (MoCtApp 1988); Brenneman Mech. &

Elec., Inc., 495 NE2d at 239. One who asserts that an absolute deed is in fact an

equitable mortgage must establish by clear and convincing evidence that such deed

was intended as security for a debt. Adrian, 2002 SD 10, ¶11, 639 NW2d at 533

(citing Commercial & Sav. Bank v. Cassem, 33 SD 294, 145 NW 551, 552 (1914)).

Although “[o]ne of the essential elements of a mortgage is debt to be secured,”

whether a document was intended as security for a debt depends on the intent of

the parties at the inception of the relationship. Abberton, 747 SW2d at 336

(examine the parties’ intent when conveyance was executed); American Nat’l Bank

v. Groft, 56 SD 460, 229 NW 376, 379 (1930) (“the broad rule is that whether such

transaction is a sale upon a condition or a mortgage depends upon the actual

intention of the parties at the time”); 59 CJS Mortgages §36.

[¶22.] In this case, the circuit court found that no equitable mortgage existed,

not because the Eichs failed to prove by clear and convincing evidence that the 1999

transaction was intended as a security agreement, but because of the Eichs’ conduct

during and after 2003. In the circuit court’s view, the Eichs knew they were in

default under the contract for deed and instead of insisting on proceeding through

foreclosure they executed the January 2003 warranty deed. Further, the court

reasoned that by paying $3,500 in response to the March 11, 2003 letter from

Myers, the Eichs accepted the terms of a one-year lease agreement. Finally, the

-11-
#23837

court found determinative the fact that the Eichs failed to assert an “equitable

mortgage” when Myers sold the home property to Mike Eich’s sister, or when the

purchase agreements were prepared in 2004.

[¶23.] By preparing purchase agreements in response to the threat of sale

from Myers in 2004, the Eichs did not necessarily jeopardize their right to seek

equitable relief. The same is also true with respect to the Eichs’ failure to contest

the transfer by Myers of the home property to Mike Eich’s sister for $202,000. Just

as we declined in Adrian to read McKinnie’s complaint hypertechnically, we cannot

interpret the Eichs’ conduct in desperation to mean that as a matter of law any

claims for equitable relief were forsaken. See 2002 SD 10, ¶16, 639 NW2d at 535.

[¶24.] While the parties’ conduct and relations after 1999 may be secondary

considerations, it was their intent at the inception of their relationship that must be

scrutinized to determine whether an equitable mortgage was created. Abberton,

747 SW2d at 336; American Nat’l Bank, 56 SD 460, 229 NW at 379 (“the broad rule

is that whether such transaction is a sale upon a condition or a mortgage depends

on the actual intention at the time”); Pittwood v. Spokane Savings & Loan Soc., 251

P 283, 285 (Wash 1926) (“character of such transactions . . . is fixed at the time of

their inception”); 59 CJS Mortgages §36.

[¶25.] To ascertain the parties’ intent at the inception of a transaction, we

identify certain elements that, if present, favor a finding that a conveyance,

absolute on its face, constitutes an equitable mortgage:

(1) pre-existing debt not extinguished with conveyance;
(2) conveyance made with agreement to re-convey;
(3) property value considerably more than the debt;

-12-
#23837

(4) property in original transaction not appraised and no
discussion of its value in relation to sale price; and
(5) dealings between the parties akin to that of creditor-debtor.

See Stava v. Stava, 383 NW2d 765, 766 (Neb 1986) (if debtor and creditor relations

continue after conveyance then the transaction is a mortgage); American Nat’l

Bank, 56 SD 460, 229 NW at 379 (strong proof that a transaction was “intended by

way of sale, rather than by way of mortgage, is that a pre-existing debt was

regarded and treated by the parties as extinguished or discharged by the

conveyance”); Commercial & Sav. Bank, 33 SD 294, 145 NW at 553 (“whether a

deed, absolute in form, is in fact a mortgage, the question whether the price is

adequate is entitled to great weight”); Wilson v. McWilliams, 16 SD 96, 91 NW 453,

456 (1902); see also Adrian, 2002 SD 10, ¶11, 639 NW2d at 533; F. Gregorie & Son

v. Hamlin, 257 SE2d 699, 702-07 (SC 1979); 59 CJS Mortgages §§36-48.

[¶26.] Based on the circumstances surrounding the original transaction and

the elements tending to prove an equitable mortgage set forth above, the

conveyance of the shop and home properties were in fact security for the $125,000

advanced by Myers. Their relationship did not begin because the Eichs were

attempting to sell their property, but because they needed money to redeem their

property. Myers, a licensed real estate broker, provided them with the necessary

money and then dictated the terms of their arrangement. The Eichs agreed to his

conditions. On September 1, 1999, they signed both a warranty deed and a contract

for deed prepared by Myers. We recognized in Adrian,

[w]here there is a deed, and contract to re-convey, and oral
evidence has been introduced tending to show that the
transaction was one of security, and leaving upon the mind a
well-founded doubt as to the nature of the transaction, then
-13-
#23837

courts of equity incline to construe the transaction as a
mortgage.

2002 SD 10, ¶15, 639 NW2d at 535 (alteration in original) (quoting Wilson, 16 SD

96, 91 NW at 456 (citation omitted)); Toulouse v. Chilili Co-op Ass’n, 770 P2d 542

(NMCtApp 1989) (“[o]ne test which may be applied in determining the nature of the

transaction is whether there exists mutuality and reciprocity of rights between the

parties”); F. Gregorie & Son, 257 SE2d at 703 (essentially “the mere fact that a

contract to reconvey was executed simultaneously with the deed creates in legal

effect a mortgage”).

[¶27.] The fact that the conveyance and contract for deed were executed on

the same day creates a strong doubt on whether this transaction was intended to be

a sale. The circumstances surrounding this case present a multitude of additional

factors tending to prove an equitable mortgage. First, there is no evidence that

Myers ever planned to be the owner of the transferred property after he advanced

the $125,000. In fact, the Eichs at all times retained possession of the premises and

continued to be the sole operators of the truck repair business on the shop property.

Steckelberg v. Randolph, 404 NW2d 144, 149 (Iowa 1987) (retaining possession of

transferred property is “inconsistent with theory of absolute conveyance”). Second,

before the transaction, no discussions were had with respect to the value of the

property in relation to the consideration provided and Myers did not have the

property appraised. Instead, Myers advanced the exact amount the Eichs needed to

redeem their property from First Bank of South Dakota and then charged a $10,000

fee for the transaction. See F. Gregorie & Son, 257 SE2d at 703-04 (citing 59 CJS

Mortgages §§40-41). Third, the home and shop properties were valued at

-14-
#23837

approximately $200,000. It defies logic to conclude that the Eichs sold both

properties for $125,000, and then also agreed to pay an additional $10,000 as a fee.

Pittwood, 251 P at 286 (“where the disparity between the amount of the

indebtedness and the value of the property is so great as to necessarily lead to the

conclusion that the deed was intended as security, the courts will, without

hesitation, so declare”).

[¶28.] Further evidence that a sale was not intended is the declaration in the

letter from Myers to the Eichs summarizing their arrangement. He specifically

stated that the conveyance was intended to provide security for the transaction, and

he did not suggest that the $125,000 was consideration for a purported sale. Star

Enterprise, 783 FSupp at 1567 (“[a]n equitable mortgage exists where there is a

manifestation that real property serve as security for the payment of a debt or

obligation”); Adrian, 2002 SD 10, ¶11, 639 NW2d at 533 (“[o]ne of the essential

elements of a mortgage is a debt to be secured”) (quoting American Nat’l Bank, 56

SD 460, 229 NW at 379); 59 CJS Mortgages §41. Another strong element present in

this case is that the debt was created as a result of the transaction and continued to

remain after the transaction. Adrian, 2002 SD 10, ¶11, 639 NW2d at 533 (citing

American Nat’l Bank, 56 SD 460, 229 NW2d at 379 (citing 41 CJ 287; Jones on

Mortgages (8thed) §§314, 316, 318)); Steckelberg, 404 NW2d at 148-49; F. Gregorie

& Son, 257 SE2d at 702-03; 59 CJS Mortgages §40. Finally, when a debtor and

creditor relationship continues to exist after the transaction, this tends to indicate

that the conveyance was intended to be security, not a sale. Stava, 383 NW2d at

766; Pittwood, 251 P at 285. Here, the debtor and creditor relationship continued

-15-
#23837

well after the conveyance. The Eichs’ obligation began at $135,000, but as the

amortization schedule reflects, Myers advanced them $40,098.74 in 2001 and

$64,800 in 2003. After each loan, Myers recorded the transactions in a

computerized amortization schedule, which then added the amount to their existing

obligation.

[¶29.] Considering all the circumstances, there was strong evidence that the

absolute conveyance in 1999 was intended as a security for debt, thereby creating

an equitable mortgage. However, there were subsequent transactions, two

warranty deeds in 2003 and a purported lease agreement, which attempted to alter

the nature of the 1999 transaction. According to Myers, the 2003 warranty deeds

were executed by the Eichs “because they were fully aware they were persistently

delinquent in payments . . . under the 1999 contract for deed and they wanted to

avoid another foreclosure and the involvement of attorneys.” The Eichs, however,

maintain that the new deeds were executed only to provide security for the new

loans and that they never intended to convey their property to Myers or become

tenants under a lease agreement.

[¶30.] What, then, is the significance of the 2003 warranty deeds and

purported lease agreement, if the transaction in 1999 amounted to an equitable

mortgage? It is well settled that “once a mortgage always a mortgage.” F. Gregorie

& Son, 257 SE2d at 708; Humble Oil & Refining Co., 303 A2d at 905-06; Borgerding

Inv. Co. v. Larson, 170 NW2d 322, 325 (Minn 1969); Hudkins v. Crim, 78 SE 1043,

1046 (WVa 1913); Tant v. Guess, 16 SE 472, 477 (SC 1892); 59A CJS Mortgages

§1000; see also Meyerson v. Werner, 683 F2d 723, 729 (2dCir 1982) (Pratt, J.,

-16-
#23837

concurring in part and dissenting in part). This rule is not flexible. It has been

“firmly established from an early day that when the character of a mortgage has

attached at the commencement of the transaction, so that the instrument, whatever

be its form, is regarded in equity as a mortgage, that character of mortgage must

and will always continue.” Humble Oil & Refining Co., 303 A2d at 905 (citation

omitted); see also Borgerding Inv. Co., 170 NW2d at 325.

[¶31.] When an equitable mortgage exists, “nothing short of the actual

payment of the debt, or an express release will operate as a discharge of the

mortgage.” Tant, 16 SE at 477 (citation omitted); see also 59A CJS Mortgages

§1000. This right cannot be restrained or barred except by methods prescribed in

law. A mortgagor’s right to redeem is inseparable to a mortgage relationship. A

release “will not be inferred from equivocal circumstances and loose expressions.”

Jolivet v. Chaves, 52 So 99, 103 (La 1910) (citations omitted). The subsequent

transactions, therefore, must be closely scrutinized. See American Nat’l Bank, 56

SD 460, 229 NW at 379 (citing Wilson, 16 SD 96, 91 NW 453); Jolivet, 52 So at 103;

Tant, 16 SE at 476-77.

[¶32.] The force of the doctrine of equitable mortgage cannot be avoided in

this case merely because a lease agreement existed or the 2003 warranty deeds

were executed by the Eichs. Borgerding Investment Co., 170 NW2d at 327 (one

“cannot by changing the form of the transaction cause a forfeiture of the [party’s]

right of redemption”); Tant, 16 SE at 476 (“[t]he relation of a mortgagor and

mortgagee continued to exist notwithstanding the various changes in the legal

title”); see also Meyerson, 683 F2d at 729 (Pratt, J., concurring in part and

-17-
#23837

dissenting in part) (“New York has long prevented parties to a real estate

transaction from avoiding the protections due a mortgagor by disguising the nature

of the transaction”). Instead, Myers had the burden of establishing that the Eichs

entered into the subsequent transactions with knowledge that they released their

right of redemption and that they received fair and adequate consideration for that

release. See F. Gregorie & Son, 257 SE2d at 708; Hudkins, 78 SE at 1047; Jolivet,

52 So at 103.

[¶33.] The record in this case does not show that Myers obtained a release

from the Eichs or that the Eichs knew that by conveying their property to him in

2003 they would be waiving any right of redemption. Further evidence that a

release was not obtained is that the existing debt was not extinguished after the

2003 conveyance. Instead, the record clearly reflects that after the conveyance, the

Eichs continued to make payments to Myers as they had since the 1999 transaction.

We place little significance on the purported lease agreement as there was nothing

surrounding this transaction that provided an explicit release by the Eichs of their

right of redemption. It has long ago been recognized in South Dakota that “[p]arties

seeking to take an undue advantage of mortgagors situated as the plaintiff was in

this case almost invariably seek to cover up the transaction by inducing the party to

whom the loan was really made to take a lease of the property; hence the mere fact

of leasing should have but little weight with a court of equity, which seeks to

discover the real transaction.” Wilson, 16 SD 96, 91 NW at 457; see also Adrian,

2002 SD 10, ¶16 n2, 639 NW2d at 535 n2.

[¶34.] Because the circumstances surrounding the 1999 transaction created

-18-
#23837

an equitable mortgage and nothing in the record establishes that the Eichs

knowingly waived their equitable right to redeem, the 2003 warranty deeds and

later purported lease did not alter the form of the transaction. Therefore, the circuit

court abused its discretion when it declined the remedy of equitable mortgage. We

need not address the Eichs’ second issue because our holding on the first issue is

dispositive of the case.

[¶35.] Reversed and remanded.

[¶36.] GILBERTSON, Chief Justice, and SABERS, ZINTER, and

MEIERHENRY, Justices, concur.

-19-