Johnson v. National Bank of Commerce of Tacoma

• Decision Date: 09 October 1911
• Citation: 118 P. 21,65 Wash. 261
• Court: Washington Supreme Court
• Parties: JOHNSON et al. v. NATIONAL BANK OF COMMERCE OF TACOMA.

118 P. 21

65 Wash. 261

JOHNSON et al. v. NATIONAL BANK OF COMMERCE OF TACOMA.

Supreme Court of Washington

October 9, 1911

Department 1. Appeal from Superior Court, Pierce County; C. M Easterday, Judge.

Bill by Curtis M. Johnson and others against the National Bank of Commerce of Tacoma. Decree for complainants, and defendant appeals. Reversed with directions.

F. S. Blattner and Ellis, Fletcher & Evans, for appellant.

William P. Reynolds and Bates, Peer & Peterson, for respondents.

GOSE, J.

This is a bill in equity prosecuted by the surviving husband and heirs and the administrator of the estate of Emma M. Johnson deceased, for the purpose of having a deed, lease, and option of purchase decreed to be a mortgage, for an accounting and redemption, or in the alternative for damages. The case was dismissed as to the subsequent purchasers of the property; the court finding that the property was purchased in good faith and without notice of any claim of right in the plaintiffs. Thereupon the court found that the transaction was intended to be a mortgage and entered a judgment in favor of the plaintiffs for the difference between the value of the property at the time of the trial, and amount of the indebtedness plus interest, taxes, assessments, etc. The defendant, the National Bank of Commerce, has appealed.

The essential preliminary facts are as follows: On September 12 1892, the respondent Curtis M. Johnson, hereafter called the 'respondent,' was indebted to the appellant in sums aggregating with interest $9,368.28, and upon that date executed to appellant his note for that amount, due in one year, bearing interest at the rate of 10 per cent. per annum together with a mortgage upon the premises in controversy to secure the same. On September 18, 1893, he executed to the appellant a renewal note for the principal of such note, payable six months after date with interest at 12 per cent. per annum, with a mortgage on the same property to secure its payment. On the 1st day of March, 1897, he was indebted to the bank for the full amount of the principal of the note, together with unsecured notes sufficient to make his indebtedness on that date $14,000. At the time of executing the real estate mortgages, he gave the appellant a chattel mortgage upon the machinery in the mill situated upon the mortgaged property as additional security. On March 1, 1897, Johnson and wife conveyed to the appellant the property covered by the real estate and chattel mortgages by a deed of general warranty. The deed recites a consideration of $14,000. On March 3, 1897, and as a part of the transaction, the appellant executed to Johnson a lease of the conveyed premises for the term of three years from the 1st day of March, 1897. The lease recites that the appellant is the owner of the property. By the terms of the lease, Johnson agrees that he will 'pay annually as rent for said property the sum of eight hundred and forty ($840) dollars,' payable every 60 days during the leasehold period; that he will pay all taxes due or to become due during the continuance of the lease; that he will keep the buildings and machinery insured in the sum of $4,000, payable to the appellant in case of loss, the policies to be assigned to it. It is further agreed that in case of fire, and the loss exceeds $4,000, the appellant shall have the right to appropriate the insurance to the payment of the loss 'and declare this lease at an end, unless Johnson shall pay the said sum of $14,000 or as much thereof as may remain at said time,' provided, however, that if Johnson shall furnish a sufficient sum of money within 60 days when added to the insurance 'to repair said loss entirely,' then the $4,000 insurance shall be used to replace the loss. It is further stipulated that, if Johnson has kept his covenants at the expiration of the lease, the appellant will upon his paying the sum of $14,000 convey him the property, by a deed containing covenants of warranty against all acts done or suffered to be done by the appellant, and that Johnson 'shall not underlet said property without the consent' of the appellant, and that in event the property 'be underlet or sold under legal process this lease shall become void and of no effect and shall terminate at once.' Both the deed and the lease were filed for record on March 4th following their execution. Between March 1, 1900, and the 8th day of January, 1901, Johnson continued in possession of the property under the terms of a parol agreement, paying the stipulated rent.

On the last-named date, the appellant again leased the property to Johnson for the term of three years, from the 1st day of January, 1901. This lease also recites that the appellant is the owner of the property and contains the same provision against underletting and sale under legal process as the first lease. By the terms of this lease Johnson agrees to pay annually 'as rent' for the property $840 for the first year, $780 for the second year, and $660 for the third year. He further agrees to pay, 'as part of the purchase price in addition to such rental,' the sum of $1,000 at the end of the first year, $2,000 at the end of the second year, and $3,000 at the end of the third year. This lease contains substantially the same provisions in relation to the payment of taxes, keeping the property insured, and the application of the insurance in case of fire as the first lease, except that it provides that the insurance shall be $5,000. It is further stipulated that, if at the expiration of the lease Johnson has performed all his covenants, he 'shall have the option to purchase' the property from the appellant upon paying it the sum of $8,000. Upon the delivery of the deed, the appellant delivered all the notes to Johnson, and on March 4th following satisfied the mortgages. The satisfaction recites that the mortgage, 'together with the debt thereby secured, is fully paid, satisfied, and discharged.' Substantially all the property in controversy is tideland. On March 4, 1897, and as a part of the transaction, Johnson assigned to the appellant a contract which he had with the state for the purchase and sale of the property. On April 20, 1904, the appellant having made the final payment upon the tideland contract, the state conveyed the property to it. On October 30, 1905, the appellant entered into a contract for the sale of the property to a third party, and on February 6, 1906, it conveyed it to the purchaser. The bona fides of this sale is not raised by the appeal. The only question we need to consider is: Did the parties intend that the transaction should be a mortgage?

It is well settled that the character of the transaction is fixed at its inception and that it is what the intention of the parties make it. Clambey v. Copland, 52 Wash. 580, 100 P. 1031; 20 Am. & Eng. Enc. L. (2d Ed.) 938; 1 Jones on Mortgages (3d Ed.) § 263.

It is also well settled that when property is conveyed by a deed absolute in form, and there is no defeasance or collateral agreement in writing, clear and convincing evidence must be produced to establish that the deed was given as security and was intended as a mortgage. Reynolds v. Reynolds, 42 Wash. 107, 84 P. 579; Hesser v. Brown, 40 Wash. 688, 82 P. 934; Dabney v. Smith, 38 Wash. 40, 80 P. 199; Reed v. Parker, 33 Wash. 107, 74 P. 61; Swarm v. Boggs, 12 Wash. 246, 40 P. 941; Runyon's Adm'r v. Pogue (Ky.) 42 S.W. 910; 20 Am. & Eng. Enc. L. (2d Ed.) 954; Jones on Mortgages (6th Ed.) § 335.

The respondents earnestly contend that where a mortgagor conveys the mortgaged property to the mortgagee by a deed absolute for the amount of the mortgage debt and takes from it a lease with an option to purchase for the same amount, with interest, the presumption arises that the parties intended the transaction to be a mortgage, and that the burden is cast upon the grantee to show by clear and convincing evidence that the parties intended the transaction to be a conditional sale. Many authorities are cited which it is contended support this view. A reading of the cases cited, however, has convinced us that very few of them state the rule so broadly. It must, however, be admitted that a great many courts have announced the rule that courts of equity incline against conditional sales, and that, when it is doubtful from all the attending circumstances whether a sale with a right to repurchase or a mortgage was intended, equity will construe the transaction to be a mortgage. Such rule is declared in Turnipseed v. Cunningham, 16 Ala. 501, 50 Am. Dec. 190; Keithley v. Wood, 151 Ill. 566, 38 N.E. 149, 42 Am. St. Rep. 265; Cosby v. Buchanan, 81 Ala. 574, 1 So. 898; O'Neill v. Capelle, 62 Mo. 202; Rockwell v. Humphrey, 57 Wis. 410, 15 N.W. 394; and Edrington v. Harper, 3 J. J. Marsh. (Ky.) 353, 20 Am. Dec. 145. They further say that the execution of a defeasance or collateral agreement by the grantor simultaneously with an absolute conveyance, the debt remaining unpaid, will generally be held to stamp the transaction as a mortgage. They, however, concede that the intention of the parties, when ascertained, is controlling.

In Smith v. Jensen, 16 N.D. 408, 114 N.W. 306, cited by the respondents, commenting on the force to be given a contemporaneous agreement to reconvey, it is said: 'There is no absolute rule that the covenant to reconvey should be regarded, either in law or in equity, as a defeasance. The covenant to reconvey, it is true, may be one fact, taken in connection with other facts, going to show that the parties really intended the deed to operate as a mortgage, but standing alone it is not sufficient to work that result.' It is further said: 'In order to destroy the recitals in a deed or other contract, the proof must be clear, strong and...