[ PUBLISH]
IN THE UNITED STATES COURT OF APPEALS
FOR THE ELEVENTH CIRCUIT FILED
________________________ U.S. COURT OF APPEALS
ELEVENTH CIRCUIT
JULY 27, 2007
No. 04-15891
THOMAS K. KAHN
________________________
CLERK
D.C. Docket No. 04-01189-CV-RWS-1 & 01-65356 BKC-PW
IN RE: RICHARD JON COX,
Debtor.
______________________________________________________________
R. DENNIS CHRISTOPHER,
Plaintiff-Appellant,
versus
RICHARD JON COX,
Defendant-Appellee.
__________________________
Appeal from the United States District Court
for the Northern District of Georgia
_________________________
(July 27, 2007)
Before TJOFLAT and KRAVITCH, Circuit Judges, and LIMBAUGH,* District
Judge.
PER CURIAM:
The question this appeal presents is whether the bankruptcy court erred in
determining that the contemporaneous execution of a warranty deed to a tract of
land and a contract giving the grantee an option to purchase the land within a time
certain created a mortgage in which the grantee became the mortgagor and the
grantor the mortgagee. The district court found no error and upheld the
bankruptcy court’s ruling. We affirm.
I.
A.
In 1984, Richard Jon Cox became the owner of the Bar C Ranch (the
“Ranch”), a 450-acre tract of land on the outskirts of the City of Covington,
Georgia. In 1994, Cox sold a half interest in the Ranch to Lamar Banks. AgSouth
Farm Credit, ACA financed part of Banks’s purchase by loaning him $775,000.1
A mortgage on the Ranch, executed by Banks and Cox as tenants-in-common,
secured the loan. Soon after Banks acquired his interest in the Ranch, he and Cox
*
Honorable Stephen N. Limbaugh, United States District Judge for the Eastern District of
Missouri, sitting by designation.
1
The loan was made by AgSouth Farm Credit, ACA’s predecessor, West Georgia Farm
Credit, ACA; we refer to both as “AgSouth.”
2
entered into a buy-sell agreement, whereby either could offer to purchase the
other’s interest in the Ranch for $750,000 or more.2 The party receiving the buy-
out offer would have the option to purchase the offeror’s interest for the price
indicated in the buy-out offer.3
On October 6, 1999, Banks offered to purchase Cox’s interest for
$875,000.4 As Cox was considering the offer, the property was being appraised at
$2,445,700. On November 16, after the appraisal had been completed, Cox
exercised his option to purchase Banks’s interest for the same price, $875,000.5
Under the buy-sell agreement, Cox had ninety days to close. To close the
transaction, Cox would need more than $1.2 million: $700,000 to pay off the
AgSouth mortgage and more than $500,000 for Banks’s interest (after deducting
Banks’s share, $300,000, of the balance due on the AgSouth mortgage).6
Cox sought a loan from the Main Street Bank, in Covington, to finance the
2
The agreement set a floor value on the property as a whole of 1.5 million.
3
Under the buy-sell agreement, the offeree had 30 days to exercise his option to purchase
the property. If he did not do so, the offeror had 90 days to close the transaction.
4
Banks was treating the property as a whole as worth $1.75 million.
5
Cox waited more than the 30 days allotted him under the agreement to exercise his
option to purchase the property. See note 3, supra. The record is silent as to why Banks did not
consider Cox’s November 16 exercise of the option a nullity. All we know is that he treated
Cox’s exercise as timely.
6
These figures are approximations. The exact amounts are not material for our purposes.
3
buy-out. The bank agreed to make the loan provided that someone acceptable to
the bank guaranteed the loan. Cox turned to R. Dennis Christopher for help.
Christopher was his insurance agent and a long-time friend; he was also an
experienced real estate investor. Christopher agreed to guarantee the loan, and so
notified the bank. The bank, meanwhile, reconsidered the matter; if a loan was to
be made, it would be made to Christopher alone. Christopher was not interested,
however; he was not going to sign a note for $1.225 million. He was willing to
help Cox out, but not that way. Christopher had an alternative plan in mind, which
he proceeded to execute.
Rather than borrowing $1.225 million to pay off the AgSouth mortgage and
Banks’s interest in the Ranch, he would obtain AgSouth’s consent to his
assumption of the mortgage. If AgSouth consented, all he would have to advance
at the closing would be the funds sufficient to pay Banks – funds he either had on-
hand or readily accessible – and the closing costs.
AgSouth agreed to Christopher’s assumption of the mortgage, and the
closing went forward on February 16, 2000. At the closing, Christopher assumed
the AgSouth mortgage and paid Banks for his equity in the property. His out-of-
pocket outlay totaled approximately $545,000.
Several documents were executed at the closing. Two are pertinent here: a
4
warranty deed executed by Cox, as grantor, in favor of Christopher, as grantee,
and an option contract.7 The contract gave Cox the option to purchase the
property within 365 days. The purchase price would amount to the sum of the
following, with interest at the rate of 9.25% per annum: the costs Christopher
incurred in connection with the February 16 closing; the amount he paid to Banks;
his mortgage payments to AgSouth; any expenditures he may have made to
maintain the Ranch; and a $100,000 “kicker.” Unless Cox exercised the option,
however, he would owe Christopher nothing.8
Christopher did not take possession of the Ranch after the closing. Instead,
Cox continued to reside there rent-free, paid the property taxes, and kept the
property insured. And Cox immediately set about the task of finding a purchaser
for the Ranch – at a price sufficient to adequately compensate him for his equity in
the farm and cover what Christopher would be due under the option contract.
Several residential developers expressed an interest in the property; some
extended offers to purchase it. The offers came to naught, however. On March 5,
2001, after two extensions, Cox’s option to purchase the property expired.
7
The consideration cited in the warranty deed was “ten dollars and other good and
valuable consideration.” The consideration cited in the option contract was “one dollar.”
8
The option contract did not state, but the parties nonetheless agreed, that if Cox
exercised his option, he would grant Christopher, as his real estate agent, a non-exclusivelisting
for a 5% commission.
5
B.
After Cox’s option expired, an associate of Christopher’s, acting on
Christopher’s behalf, contacted, Dwayne Key, a realtor who earlier had made an
offer (to Cox) for the property that fell through. Over the next three months,
between March and June 2001, Key, in turn, located two potential buyers for the
land.
Meanwhile, on April 20, 2001, Cox petitioned the United States Bankruptcy
Court for the Northern District of Georgia for Chapter 11 relief. Shortly
thereafter, as debtor-in-possession, Cox commenced an adversary proceeding
against Christopher to determine the extent of the bankruptcy estate’s interest in
the Ranch. Christopher answered the complaint, alleging that he owned the
property by virtue of the warranty deed Cox had given to him on February 16,
2000. Christopher also filed a counterclaim, in an attempt to recover rent for
Cox’s occupancy of the Ranch after his option expired.
Pursuant to an order issued by the bankruptcy court, the property was sold at
auction on July 18, 2001 for $2.8 million. The sale closed the following month.
The proceeds of the sale were used to (1) satisfy the balance due on the AgSouth
mortgage, (2) reimburse Christopher for the monies he had paid AgSouth and
Banks, and (3) pay Christopher the $100,000 “kicker,” interest (at 9.25% per
6
annum) on the funds he had advanced, and his attorney’s fees.
On October 9, 2003, the bankruptcy court held a bench trial in the adversary
proceeding. After considering what Cox and Christopher had to say, the testimony
of their witnesses, and the documentary evidence presented, the court rendered its
decision on October 20, 2003. The court found that, under the circumstances
leading up to and surrounding the parties’ dealings, the parties intended that the
warranty deed and the option contract create a mortgage. Cox’s estate was
therefore entitled to the balance of the $2.8 million that had been paid for the
Ranch.
Christopher appealed the decision to the district court. Concluding that the
bankruptcy court’s findings of fact were not clearly erroneous and that the court’s
application of Georgia law to those findings was correct, the district court
affirmed. This appeal followed.9
II.
The proposition that a transaction that is, on its face, an absolute
conveyance of title, may, in actuality, convey title only as security for a loan is
9
Like the district court, we review the bankruptcy court’s findings of fact for clear error
and the court’s conclusions of law and mixed questions of law and fact de novo. See In re
Calvert, 907 F.2d 1069, 1071 (11th Cir. 1990).
7
black letter law. See Restatement (Third) of Prop.: Mortgages § 3.2 (1997). It is
necessary to look beyond the four corners of some conveyances – to consider parol
evidence – to determine, in light of all the circumstances, whether the parties to
the transaction intended to transfer title or create to create a mortgage.10 See
Russell v. Southard, 53 U.S. (12 How.) 139, 152, 13 L.Ed. 927 (1851); Conway’s
Ex’rs and Devisees v. Alexander, 11 U.S. (7 Cranch) 218, 237, 3 L. Ed. 321
(1812); Spence v. Steadman, 49 Ga. 133, 138 (Ga. 1873).11
Georgia law has long recognized that the determinative factor in
distinguishing a mortgage from an absolute conveyance is the intent of the parties.
See Monroe v. Foster, 49 Ga. 514, 519 (Ga. 1873) (“[I]f . . . it appear that the loan
of money and security for its repayment was, in truth, the purpose and intent of the
parties, it will be treated as such, notwithstanding very strong language may be
used at the time to give it a different appearance.”); see also Restatement (Third)
of Prop.: Mortgages § 3.2 (1997). The intent of the parties in a given scenario is a
question of fact. Spence, 49 Ga. at 139 (“The question of intention is one of fact,
10
This is done because lenders often seek to disguise mortgages as conveyances to avoid
the pro-mortgagor regime of law. See Restatement (Third) of Prop.: Mortgages § 3.2 cmt. a
(1997).
11
Not all conditional sales may automatically be deemed mortgages. On occasion, a
repurchase option may be truly intended by the parties, and if so, those conveyances are not
deemed mortgages. See Conway’s Ex’rs and Devisees, 11 U.S. (7 Cranch) 218 at 236– 37.
8
to be decided from all the circumstances.”).
Christopher contends that, under Georgia law, a transaction cannot be
deemed a mortgage unless it creates a creditor-debtor relationship between the
parties – that absent a right to recourse by the purported lender against the
purported debtor, the conveyance is what it is on its face, a conditional sale.
Historically, the explicit creation of a creditor-debtor relationship, while an
important factor to be considered, has not been dispositive. See Conway’s Ex’rs
and Devisees, 11 U.S. (7 Cranch) at 237. Christopher argues that the Georgia
Supreme Court identified the explicit creation of such a relationship as a
requirement for a conveyance to be construed as a mortgage in Haire v. Cook, 229
S.E.2d 436 (Ga. 1976), and Tingle v. Tingle, 179 S.E.2d 51 (Ga. 1971).
It is true that both Haire, and Tingle place great weight on the purported
lender’s lack of recourse against the purported debtor, and both cases contain
language that supports Christopher’s contention. See Haire, 229 S. E. 2d at 439
(“[T]here is no evidence that the grantee had the right to demand repayment and
no evidence that either plaintiff agreed to be obligated to repay the debt. . . . Thus
the deed cannot be considered to be a mortgage.”); Tingle, 179 S. E. 2d at 55 (“For
a security transaction to exist there must be the relationship of debtor and
creditor.”) We agree, however, with the distinctions pointed out by the district
9
court in affirming the bankruptcy court’s decision. In neither Tingle nor Haire did
the supreme court fully consider all the circumstances surrounding the transaction,
as required by Spence. Instead, both courts looked only to the face of the
conveyances and finding no indication of an intent to create a mortgage there, the
courts concluded that the transactions in question were sales. Also, in both Haire
and Tingle, there was not, as there is here, a great disparity between the
consideration paid for the property and the property’s value.
As the bankruptcy court noted, “reliance on [a recourse obligation] as a
defining element of a loan transaction overlooks the fact that numerous secured
real estate loan transactions are nonrecourse loans[.]” Express creation of a
recourse obligation – or the absence thereof – is undoubtedly an important factor
to consider, but it cannot not the determinative factor. Instead, a court must look
at the intent of the parties in light of all the circumstances surrounding the
transaction. Spence, 49 Ga. at 139.
We conclude that the bankruptcy court properly held, and the district court
properly affirmed, that parties may create a mortgage although the instruments
they use suggest that a conveyance of title rather than the creation of a lien. A
lien may be created even when there is no provision for the payment of the debt.
Having reached this conclusion, we now consider whether the bankruptcy court
10
clearly erred in finding that Christopher and Cox intended a mortgage.
III.
Whether Cox and Christopher intended to create a mortgage is a question of
fact. Spence v. Steadman, 49 Ga. 133, 139 (Ga. 1873). In finding that they
intended the transaction to create a mortgage, the bankruptcy court relied on
numerous subsidiary facts established at the adversarial hearing. Perhaps the
most powerful among these was the value of the Cox tract at the time of the
February 16, 2000 closing as compared to the value of the consideration paid by
Christopher. At the closing, Christopher received title – subject to Cox’s
repurchase option – to a tract that had been valued three months earlier at nearly
$2.5 million. Christopher assumed the outstanding AgSouth mortgage, which had
an unpaid principal balance of around $700,000, and paid Banks $500,000 for
Banks’s share of the property’s equity. Christopher did not make any payment to
Cox for his share of that equity. In other words, Christopher received title to the
Cox tract in exchange for consideration equal to about half the property’s value:
$1.2 versus $2.5 million.
A gross disparity between the sale price and the actual value of the land is
evidence of the parties’ intent to create a security interest – a mortgage – rather
than a sale. See Russell v. Southard, 53 U.S. (12 How.) 139, 147–48, 13 L. Ed.
11
927 (1851) (holding that extraneous evidence is admissible to inform courts of all
material facts surrounding the delivery of the deed, and concluding that “it is of
great importance to inquire whether the consideration was adequate to induce a
sale”); Conway’s Ex’rs and Devisees, 11 U.S. at 241 (“A conditional sale . . . at a
price bearing no proportion to the value of the property would bring suspicion on
the whole transaction. The excessive inadequacy of price would, in itself, in the
opinion of some of the judges, furnish irresistible proof that a sale could not have
been intended.”); Monroe v. Foster, 49 Ga. 514, 519 (Ga. 1873). In Russell, for
example, the Supreme Court found that the consideration paid as part of the
absolute deed transaction – less than $5,000 for land valued at several thousand
dollars more – was “grossly inadequate” in that “there was no real proportion
between the alleged price and the value of the property said to have been sold.”
Russell, 53 U.S. at 149. Similarly, in this case the consideration paid for the
Ranch – scarcely half its actual value – was grossly inadequate, indicating that a
sale was not really intended.
The absence of proportionality between the property’s value and the
consideration Christopher paid is not the only factor the bankruptcy court relied on
to find that the parties intended to create a mortgage. The court also noted that
Christopher and Cox did not negotiate the value of the property. The price was set
12
by the amount Cox required under his buy-sell agreement with Banks.
Christopher paid the exact amount Cox needed to avoid being compelled to sell
the Ranch. The absence of negotiations, coupled with the congruence between the
price paid and the amount Cox needed to remain on the Ranch, indicate that
Christopher intended the money he provided as a loan to Cox and not as the
purchase price for the tract.
Likewise, the terms of the repurchase option indicate that the parties
intended the transaction to create a mortgage. To exercise his option to re-
purchase the tract, Cox had to pay Christopher a $100,000 “kicker” and interest at
9.25% on Christopher’s total initial outlay. These terms, in the bankruptcy court’s
view, indicated that Christopher viewed the transaction as an investment
opportunity – a loan.
In its order affirming the bankruptcy court’s decision, the district court
noted an additional factor supporting the finding that Christopher and Cox
intended to create a mortgage. Following the closing, Cox continued to occupy
the Ranch – and pay the real estate taxes and the insurance premiums on the
policies covering the property – without paying Christopher any rent. Thus,
Christopher and Cox continued to act as though Cox owned the property.
In light of the foregoing facts, the bankruptcy court’s finding that
13
Christopher and Cox intended to create a mortgage was not clearly erroneous. The
district court’s decision upholding the bankruptcy court’s determination is
therefore
AFFIRMED.
14