JOHNSON et al. v. NATIONAL BANK OF 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 Whether an absolute deed to real estate is mortgage and entered a judgment in favor of a mortgage or absolute conveyance depends on the plaintiffs for the difference between the For other cases see same topic and section NUMBER in Dec. Dig. & Am. Dig. Key No. Series & Rep'r Indexes

value of the property at the time of the | let said property without the consent" of the trial, and the amount of the indebtedness appellant, and that in event the property "be plus interest, taxes, assessments, etc. The defendant, the National Bank of Commerce, has appealed.

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

sions 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

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 Sep tember 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 prop-lease contains substantially the same provierty 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 ex-lease Johnson has performed all his cove ecuted to Johnson a lease of the conveyed nants, he "shall have the option to purchase" premises for the term of three years from the the property from the appellant upon paying 1st day of March, 1897. The lease recites it the sum of $8,000. Upon the delivery of that the appellant is the owner of the prop- the deed, the appellant delivered all the erty. By the terms of the lease, Johnson notes to Johnson, and on March 4th followagrees that he will "pay annually as renting satisfied the mortgages. The satisfaction 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 ap- [2] It is also well settled that when prop

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?

[1] 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 Pac. 1031; 20 Am. & Eng. Enc. L. (2d Ed.) 938; 1 Jones on Mortgages (3d Ed.)§ 263.

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 Pac. 579; Hesser v. Brown, 40 Wash. 688, 82 Pac. 934; Dabney v. Smith, 38 Wash. 40, 80 Pac. 199; Reed v. Parker, 33 Wash. 107, 74 Pac. 61; Swarm v. Boggs, 12 Wash. 246, 40 Pac. 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, equíty 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 South. 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 Rose v. Gandy, 137 Ala. 329, 34 South. 239, cited by the respondent, it is said that when a conveyance is absolute, and the controversy is whether the parties contemplated an unconditional sale or a mortgage, clear and convincing evidence is required by the party asserting that the transaction was intended as a mortgage; but that when the writing must be departed from to ascertain the true transaction-that is, whether a repurchase or a redemption was intended-the rule is not so stringent.

Wilson v. McWilliams, 16 S. D. 96, 91 N. W. 453, cited by the respondent, takes the view that, to show that a deed absolute in form was intended as a mortgage to secure the payment of a debt, the evidence must be clear, satisfactory, and convincing, but, if from all the evidence a doubt arises as to whether the transaction is a mortgage or a conditional sale, the doubt must be resolved by holding the instrument to be a mortgage.

In Hughes v. Harlam, 166 N. Y. 427, 60 N. E. 22, also cited by the respondent, it was held that an inspection of the writings showed the transaction to be a mortgage.

[3] We think the better rule is that, where there is a deed absolute in form either with or without a contemporaneous agreement for a resale of the property, there being nothing upon the face of the collateral papers to show a contrary intent, the presumption of law, independent of evidence, is that the transaction is what it appears to be, and that he who asserts that the writing should be given a different construction must show by clear and convincing evidence that a mortgage, and not a sale with the right to repurchase, was intended. This rule has the support of at least two decisions of the Supreme Court of the United States. Wallace v. Johnstone, 129 U. S. 58, 9 Sup. Ct. 243, 32 L. Ed. 619; Bogk v. Gassert, 149 U. S. 17, 13 Sup. Ct. 738, 37 L, Ed. 631. In the former it is said: "A deed of lands, absolute in form with general warranty of title, and an agreement by the vendee to reconvey the property to the vendor or a third person, upon his payment of a fixed sum within a specified time, do not of themselves constitute a mortgage; nor will they be held to In Smith v. Jensen, 16 N. D. 408, 114 N. operate as a mortgage, unless it is clearly W. 306, cited by the respondents, commenting shown, either by parol evidence or by the on the force to be given a contemporaneous attendant circumstances, such as the condiagreement to reconvey, it is said: "There is tion and relation of the parties, or gross inno absolute rule that the covenant to recon- adequacy of price, to have been intended by vey should be regarded, either in law or in the parties as a security for a loan or an equity, as a defeasance. The covenant to existing debt." In commenting upon the reconvey, it is true, may be one fact, tak- Wallace Case, it is said, in the Bogk Case: en in connection with other facts, going to "The purport of this case is that, in the show that the parties really intended the absence of proof of a debt or of other exdeed to operate as a mortgage, but stand-planatory testimony, the parties will be held ing alone it is not sufficient to work that to have intended exactly what they have result." It is further said: "In order to destroy the recitals in a deed or other contract, the proof must be clear, strong, and convincing."

said upon the face of the instruments." In these cases it was contended that the execution of a contemporaneous agreement for a resale relaxes the rule first stated as to

the quantum of evidence required in such | Swarm v. Boggs, 12 Wash. 246, 40 Pac. 941; cases. "In order to convert what appears to Reed v. Parker, 33 Wash. 107, 74 Pac. 61; be a conditional sale into a mortgage, the Conner v. Clapp, 37 Wash. 299, 79 Pac. 929; evidence should be so clear as to leave no Dabney v. Smith, 38 Wash. 40, 80 Pac. 199; doubt that the real intention of the parties Hesser v. Brown, 40 Wash. 688, 82 Pac. 934. was to execute a mortgage. It may well be In the Swarm Case the mortgagor conthat a person buys lands in satisfaction of veyed the property to the mortgagee by a a precedent debt, or for a consideration then deed of warranty for a consideration of the paid, and at the same time contracts to amount of the principal and interest of the reconvey the lands upon the payment of mortgage debt, viz., $1,175. The deed cona certain sum, and there is no intention on tained the following clause: "This deed is the part of either party that the transac- given in satisfaction of a certain note and tion should be, in effect, a mortgage. The mortgage for $1,000, dated March 25, 1891, covenant to recovery is not necessarily ei- and said grantors shall have the right to ther at law or in equity a defeasance. It is redeem or repurchase said premises at any one fact which may, in connection with oth- time within one year, by paying the said er facts, go to show that the parties really sum of $1,175, together with interest, until intended the deed to operate as a mortgage; said redemption, at the rate of fifteen per but standing alone it does not produce that cent. per annum, and all costs and taxes result. Something more is necessary; and paid by the grantee; the grantors to have an indispensable thing is a debt by the gran- possession for said year." Speaking of the tor to the grantee for which the convey- construction to be given to the deed as a ance is security." 1 Jones on Mortgages (3d whole, the court said: "It appears from the Ed.) § 260. See, also, Henley v. Hotaling, 41 face of this instrument, taken as a whole, Cal. 22; Sullivan v. Woods, 5 Ariz. 196, 50 that it was intended by the parties to take Pac. 113; Winters v. Swift, 2 Idaho (Hasb.) the place of a mortgage then in force be61, 3 Pac. 15; Baird v. Baird, 48 Colo. 506, tween them, and to hold that by its execu111 Pac. 79; Cowell v. Craig (C. C.) 79 Fed. tion and delivery no substantial change had 685; Conway's Executors v. Alexander, 7 been wrought in the relations of the parties Cranch, 218, 3 L. Ed. 321; Bigler v. Jack, 114 would be to hold that the making of the inIowa, 667, 87 N. W. 700; Adams v. Pilcher, strument was but an idle ceremony." 92 Ala. 474, 8 South. 757.

In the Reed Case the property was convey

In the Sullivan Case the mortgagor convey-ed by a deed absolute in form; the consideraed the property to the mortgagee by a deed absolute, and on the same day took from the grantee a lease with an option to repurchase the property for the amount of the mortgage. The lease recited that the lessee shall pay $15 per month as interest. At the time of making the deed, lease, and option, the mortgagor returned the notes to the mortgagee and released the mortgage. The court said that, construing the papers together, they show clearly that it was the intention of the parties "to save the expense of a foreclosure."

In the Baird Case the court, in speaking of the force of a deed and a bond for a deed given back to the grantor upon the same date, said: "We say here the deed and bond for a deed were complete, clear, certain, and unequivocal, beyond substantial doubt, and that their validity should have been upheld at the trial."

In 20 Am. & Eng. Enc. L. (2d Ed.) 942, the rule is thus stated: "Where the right to repurchase is optional and creates no obligation to do so on the part of the grantor, there is no mortgage, but a conditional sale." In the Adams Case it was held that, where it is sought to establish that a deed absolute with the right to repurchase was intended as a mortgage, clear and convincing evidence is required to overthrow the presumptions arising from the written instruments.

Moreover, this court has, we think, uni

tion being the payment by the grantee of certain incumbrances against the property. Contemporaneously with the execution of the deed, the grantee executed to the grantors an option to repurchase the property within two years upon their paying to the grantee all sums advanced by her including taxes and insurance, with stipulated interest. In answering the contention of the grantors that the transaction was intended to be a mortgage, the court said: "If the written contract is considered alone, without reference to any extrinsic testimony, we think it clearly sustains the findings." And, considering the question as to whether the relation of debtor and creditor existed between the grantors and the grantee, the court observed: "To have created the relation of mortgagor and mortgagee between the parties, it was essential that there should have been a debt capable of enforcement by action, and which was intended to be secured by the mortgage."

In the Conner Case the court, speaking of |he deed and contemporaneous agreement to reconvey, said: "These instruments were executed in their present form deliberately and intentionally."

In the Dabney Case, when the note and mortgage were more than five years past due and no payments had been made thereon, the mortgagors conveyed the mortgaged property to the mortgagee by a deed of general warranty. Five days later, and as a part

ecuted and delivered to the grantors a con- | parol and written, that the transaction was tract whereby they agreed to reconvey the property to the latter upon a day named upon payment to them of the mortgage note, with accumulated interest, taxes theretofore paid by the grantees, taxes thereafter to be paid, together with interest, less rent collected by the grantees with interest thereon. The contract, after reciting a cancellation of the indebtedness, provided that, in case the grantors failed to "redeem" the property on or before the date fixed in the contract, then the deed "shall be absolute" and the contract “null and void" and "of no force and effect." The court said: "We are satisfied that under the facts of the case the transaction was clearly a sale and not a mortgage."