Opinion
[No. 58, January Term, 1945.]
Decided June 28, 1945.
Deeds — When Construed as Mortgages — Clean Hands Doctrine.
A conveyance, although purporting to be an absolute sale, and without any accompanying written defeasance, contract of repurchase or other agreement, may be treated in equity as a mortgage as between the original parties, and as against those deriving title from them who are not bona fide purchasers for value and without notice, if shown to have been intended merely as security for an existing debt or a contemporaneous loan. p. 139
Whether a mortgagor's conveyance of his equity of redemption is an irrevocable transfer of title, or merely security for payment of money, may be determined either by construction of instruments of correspondence or from parol evidence, although the parties knowingly and deliberately executed the instrument without fraud, accident or mistake, and no undue advantage was taken of the mortgagor. p. 140
In suit to have deed declared a mortgage, extraneous evidence is admitted, not for the purpose of contradicting the terms of the instrument, but of raising an equity paramount to the mere form of the instrument. p. 140
In suit to have deed reconveying mortgaged realty to grantors' original vendors, who held plaintiff's note for part payment of purchase price, declared a mortgage and for an accounting, there were five reasons why the deed must be held to have been intended by the parties as security and not an absolute sale, (1) the grantee took back the title not to live in the property, but in order to prevent a foreclosure, (2) the payments of so-called "rent" thereafter by the plaintiff were turned over to the holder of the mortgage, the mortgage debt not being extinguished, (3) although the property had increased considerably in value since mortgagors purchased it from the defendant debtors, there was no cash consideration for the reconveyance, (4) grantee's agent paid the county taxes on the property, but charged same to the plaintiffs, and (5) grantee's agent paid for repairs to the dwelling after reconveyance, but charged the amount thereof to the plaintiff. p. 140
In suit by purchasers of realty to have conveyance thereof by them to their vendors, to whom they were indebted for part of the purchase, declared a mortgage, the fact that one of the plaintiff's at the time of the purchase, expressed a belief that he would receive a cash bonus from his employer, which would be used as a down payment, which did not occur, does not render applicable the unclean hands doctrine, where the vendors afterwards accepted from plaintiffs a judgment note in lieu thereof, and have not suffered loss by reason of such expression of opinion. p. 142
An equity court may decree an absolute conveyance to be a mortgage, either (1) to allow the mortgagor to redeem or (2) solely to order the mortgagee to pay the amount to which the mortgagor is equitably entitled. p. 142
Where the alleged wrongful conduct of a complainant appears not to have injured the defendant the maxim of "clean hands" cannot be successfully invoked. p. 142
Decided June 28, 1945.
Appeal from the Circuit Court for Baltimore County (GONTRUM, J.).
Suit by William A. Thomas and wife against Francis L. Klemm and others to have a deed declared to be a mortgage and to have defendant vendees and named defendant, their agent, ordered to render an account of plaintiffs' equity in the property. From a decree dismissing the bill of complaint, the plaintiffs appeal.
Reversed and remanded with directions.
The cause was argued before MARBURY, C.J., DELAPLAINE, COLLINS, GRASON, MELVIN, HENDERSON, and MARKELL, JJ.
J. Paul Schmidt, with whom were Weinberg Green on the brief, for the appellants.
T. Lyde Mason, Jr., for the appellee.
William A. Thomas and wife, of Baltimore, prayed in the Circuit Court for Baltimore County that a deed which they executed on November 29, 1941, conveying their dwelling on Rolling Road near Hebbville to Mrs. Dorothy K. Warren, be treated as a mortgage, and that Mrs. Warren, her husband, and her father, Francis L. Klemm, who acted as her agent and attorney, be ordered to render an account of their equity in the property. The appeal is from a decree dismissing the bill of complaint.
It appears from the record that in September, 1940, appellants agreed to purchase the property from Klemm for $4,250. Thomas, an employee of a firm of certified public accountants, said he had no cash to deposit, but expected to receive a bonus of $500 from the company, whereupon Klemm promised to obtain a mortgage for $3,500 and to accept $500 in cash and a note for the balance of the purchase price and the expenses of settlement. When the deed was delivered by Mrs. Warren and her husband on December 3, 1940, Thomas informed them that he did not receive a bonus. However, he and his wife executed a mortgage for $3,500 to Arlington Federal Savings and Loan Association, and Mrs. Warren accepted a judgment note for $877.49 for the balance of the purchase price and the expenses. In February, 1941, Thomas sustained injuries in an automobile accident causing loss of employment and medical expenses, as a result of which appellants were unable to make all of the payments required by the mortgage. Klemm warned that the building association threatened to foreclose. Accordingly, on November 29, 1941, appellants conveyed the property back to Mrs. Warren. The deed was not recorded until March 16, 1942. On that day Mrs. Warren entered suit on her note and obtained judgment by confession for $947.68. About a year later Klemm notified appellants to quit the premises on or before June 30, 1943. In July Mrs. Warren and her husband sold the property for $5,000.
Appellants allege that Klemm, while acting as agent and attorney for his daughter, orally agreed that the reconveyance was only for security, and that he would make every effort to sell the property and pay them the net proceeds after payment of the total indebtedness. The doctrine is firmly established that a conveyance, although purporting to be an absolute sale, and without any accompanying written defeasance, contract of repurchase, or other agreement, may be treated in equity as a mortgage as between the original parties and against all persons deriving title from the grantee who are not bona fide purchasers for value and without notice, if it is shown to have been intended merely as security for an existing debt or a contemporaneous loan. Hinkley v. Wheelwright, 29 Md. 341, 348; Funk v. Harshman, 110 Md. 127, 72 A. 665; Obrecht v. Friese, 148 Md. 484, 129 A. 657; Oxenham v. Mitchell, 160 Md. 269, 275, 153 A. 71; Coster v. Arrow Building Loan Ass'n, 184 Md. 343, 41 A.2d 83; 3 Story, Equity Jurisprudence, 14th Ed., Sec. 1364. Equity looks beyond the mere form of the instrument, however skillful the disguise may be, and seeks to discover the intention of the parties as to the real character of the transaction. Bailey v. Poe, 142 Md. 57, 69, 120 A. 242. The law is clear that any evidence, written or parol, showing the circumstances under which a conveyance was executed or the object it was designed to fulfill, is admissible to establish that the parties intended it only as security. Hence, it is possible that the question whether a mortgagor's conveyance of his equity of redemption is an irrevocable transfer of title or merely security for payment of money may be determined either by construction of instruments or correspondence or from parol evidence, although the parties knowingly and deliberately executed the instrument without fraud, accident or mistake, and no undue advantage was taken of the mortgagor by the mortgagee or other creditor in obtaining the conveyance. Hinkley v. Wheelwright, 29 Md. 341; Baugher v. Merryman, 32 Md. 185; Coster v. Arrow Building Loan Ass'n, 184 Md. 343, 41 A.2d 83. Extraneous evidence is admitted, not for the purpose of contradicting the terms of the instrument, but of raising an equity paramount to the mere form of the instrument. The court exercises jurisdiction to prevent fraud or oppression and to promote justice between the parties. Booth v. Robinson, 55 Md. 419, 451; Peugh v. Davis, 96 U.S. 332, 336, 24 L.Ed. 775.
In the case now before the court there are five reasons why the conclusion is inevitable that the reconveyance was intended by the parties as security, not as an absolute sale.
First: Mrs. Warren, who resides at Halethorpe, took back the title to the house on Rolling Road, not because she wanted to live there, or even to own it, but in order to prevent foreclosure. Appellants were allowed to continue as the occupants on condition that they would pay to Klemm $40 per month, beginning January 1, 1942.
Second: While it is argued that the parties spoke of the payments after reconveyance as "rent," and hence appellants must have become tenants, nevertheless, regardless of what the payments were called, the record shows (1) that the mortgage indebtedness was not extinguished, but the payments were turned over to the building association; and (2) that the indebtedness on the note was not extinguished. We recognize that the invariable test for determining whether a mortgagor's absolute deed of his equity of redemption actually constitutes a sale is whether the debt is extinguished. If the indebtedness is extinguished, the transaction is a sale, for if there is no obligation which the grantee can enforce, the conditions are inconsistent with the idea of a mortgage security. If, on the contrary, the grantor continues to owe the money, the court will treat the deed as a mortgage and allow the debtor to redeem. Ellis v. Purnell, 167 Md. 687, 176 A. 270; Coster v. Arrow Building Loan Ass'n, 184 Md. 342, 41 A.2d 83.
Third: It appears that although the property increased considerably in value between September, 1940, when purchased, and November, 1941, when reconveyed, there was no cash consideration for the reconveyance. In Conway's Ex'rs v. Alexander, 7 Cranch 218, 237, 3 L.Ed. 321, 328, Chief Justice Marshall laid down the rule that the inclination of the court in case of doubt is to hold a debtor's absolute conveyance to be a mortgage, for the reason that "lenders of money are less under the pressure of circumstances which control the perfect and free exercise of the judgment than borrowers," and they frequently make the effort "to avail themselves of the advantage of this superiority, in order to obtain inequitable advantages." When a mortgagor conveys his equity of redemption to a mortgagee or other creditor, the court looks upon the transaction with suspicion and disfavor, and to sustain the conveyance as between the parties as a sale without right of redemption must find after careful examination into the circumstances that it was perfectly fair and free from the slightest taint of advantage taken by the mortgagee or other creditor. Dougherty v. McColgan, 6 Gill J. 275, 282; Sheckell v. Hopkins, 2 Md. Ch. 89, 90; Baugher v. Merryman, 32 Md. 185, 192; Day v. Davis, 101 Md. 259, 269, 61 A. 576.
Fourth: Klemm, while acting as his daughter's agent and attorney, paid the Treasurer of Baltimore County the 1942 tax of $23.78 on the property, and charged this amount to appellants.
Fifth: Klemm paid $63.52 for repairs to the dwelling after the reconveyance, and likewise charged this amount to appellants.
The chancellor, in dismissing the bill of complaint, took the view that, even though the reconveyance was executed merely as security, appellants should be denied relief in equity because Thomas apparently had no basis for his expectation of reciving a bonus other than rumors among the employees of the company, and he deceived Klemm by giving greater assurance of the possibility of receiving the bonus than there actually was, and hence he did not come into court with clean hands. The maxim that "he who comes into equity must come with clean hands" closes the doors of a court of equity to any person who has violated any of the fundamental principles of equity relative to the matter in which he seeks relief, however improper may have been the behavior of the defendant. The doctrine is rooted in the historical concept of equity as a vehicle for affirmatively enforcing the requirements of conscience and good faith. While equity does not demand that its suitors shall have led blameless lives as to other matters, it does require that they shall have acted fairly and without fraud or deceit as to the controversy in issue. The maxim gives wide range to the equity court's use of discretion in refusing to aid the unclean litigant. Any wilful act concerning the cause of action which rightfully can be said to transgress equitable standards of conduct is sufficient cause for the application of the maxim by the chancellor. Schaeffer v. Sterling, 176 Md. 553, 6 A.2d 254; Precision Instrument Mfg. Co. v. Automotive Maintenance Machinery Co., 324 U.S. 806, 65 S.Ct. 993, 89 L.Ed. 1381. In this case Thomas was not represented by counsel, but relied throughout the transactions upon Klemm as Mrs. Warren's attorney. He merely expressed his belief that he would receive a bonus from his company. It cannot be said that he defrauded the attorney. Moreover, Mrs. Warren was afterwards willing to accept the judgment note, and she has not suffered any loss as a result of the expression of belief. It is an accepted rule that if the alleged wrongful conduct of a complainant appears not to have injured the defendant, the maxim cannot be successfully invoked. First National Bank of Catonsville v. Carter, 132 Md. 218, 103 A. 463; Langley v. Devlin, 95 Wn. 171, 163 P. 395, 4 A.L.R. 32.
We will, therefore, reverse the decree of the chancellor and remand the case for declaration of the reconveyance as a mortgage. Of course, a court of equity may decree an absolute conveyance to be a mortgage either (1) to allow the mortgagor to redeem or (2) solely to order the mortgagee to pay the amount to which the mortgagor is equitably entitled. Thompson v. Banks, 2 Md. Ch. 430; Funk v. Harshman, 110 Md. 127, 131, 72 A. 665. The property in this case was sold in 1943 for $5,000, and no objection was made to this sale. In our opinion a commission of $250 for making the sale is not unreasonable and can properly be allowed. After deduction of $3,108.57 for release of the mortgage, there remained a balance of $1,641.43. Out of this amount Klemm should have paid Mrs. Warren's judgment for $947.68, with interest to July 26, 1943. Instead, he ordered an attachment on the judgment. The chancellor should order Mrs. Warren to enter the judgment satisfied upon payment to her of $1,009.09. As there was no need for the issuance of an attachment, there should be no attorney's fee for collection. It appears that appellants paid to Klemm a total of $654.25 since the reconveyance, whereas Klemm paid the building association $674.21. Allowance should thus be made to Klemm for the payment of $19.96 additional to the amount received from appellants. He should also be credited with the sum of $23.78 paid to the County Treasurer for the tax for 1942, and $63.52 paid for repairs. The chancellor should decree that appellants are entitled to the balance of $525.08.
Decree reversed, and case remanded for the passage of a decree in accordance with the views expressed in this opinion, with costs to appellants.