Peugh v. Davis

Brief Fact Summary.

Plaintiff borrowed $500 from Defendant even though he had not paid off a previous loan of $1,500 from Defendant, for which Plaintiff gave Defendant a deed to his property. Defendant presented Plaintiff an instrument that recited that Plaintiff had previously sold his property to Defendant. Plaintiff sued to redeem the property. The lower court found for Defendant. Plaintiff appealed.

Synopsis of Rule of Law.

A deed will be construed as a mortgage if it is executed as security for a loan.

Facts.

In March 1857, Peugh (Plaintiff) borrowed $2,000 from Davis (Defendant), payable in two months. Plaintiff gave Defendant a deed to his property, which was written as a sale of the property. The loan was repaid and the deed returned. In May, Plaintiff borrowed $1,500 from Defendant under the same terms as before, but by January 1858, Plaintiff had not repaid the loan. In February, Plaintiff borrowed another $500 from Defendant and gave Defendant an instrument that recited that Plaintiff had previously sold the property to Defendant. He also delivered a receipt for $2,000 purporting to be the full purchase price of the property. Plaintiff sued to redeem the property. The lower court found for Defendant, and Plaintiff appealed.

Issue.

Whether a deed will be construed as a mortgage if it is executed as security for a loan.

Held.

Yes. The lower court’s ruling is reversed and remanded. A deed will be construed as a mortgage if it is executed as security for a loan.

Discussion.

A court must look beyond the terms of the instrument and determine the intent of the parties regarding whether they intended to create a security instrument or an instrument of sale. As a security instrument, the debtor has a right to redeem the property upon repayment of the debt. Although this right cannot be waived at the time of execution, a deed executed as a security instrument may later become an instrument of sale if the debtor subsequently releases his right of redemption. Such a release must be proven by unequivocal evidence and must also be for adequate consideration. The parties admit that the deed given in exchange for the $1,500 was a security. The question is then whether Plaintiff released his right of redemption for the extra $500. First, the property here is worth at least $1,500. Thus the consideration given for the release is wholly unreasonable and inadequate. Second, Plaintiff retained continuous use and possession of the property after the time of the alleged release, which contradicts the assertion that there was a sale. Finally, the instrument executed in February 1858 is ineffective as an instrument of sale. While the instrument recites that Plaintiff had previously sold the property to Defendant, it is clear that there was no prior instrument of transfer vis-à-vis the $1,500 loan or the first $2,000 loan. Thus it is no more conclusive than the original deed. Accordingly, this court finds that the parties never intended a sale of the property. The deed was executed as a security instrument.