umpqua forest ind. v. neenah-ore. land co., 188 or. 605, 217 p.2d 219 (1950)

8/9/2019 Umpqua Forest Ind. v. Neenah-Ore. Land Co., 188 Or. 605, 217 P.2d 219 (1950)

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LEXSEE 188 ORE. 605,AT 614

PositiveAs of: Jan 31, 2007

UMPQUA FOREST INDUSTRIES v. NEENAHOREGON LAND COMPANY et al.and SCHAEFER et al.

[NO NUMBER IN ORIGINAL]

SUPREME COURT OF OREGON

188 Ore. 605; 217 P.2d 219; 1950 Ore. LEXIS 170

March 8, 1950, ArguedApril 18, 1950

PRIOR HISTORY: [***1] Appeal from Circuit Court, DouglasCounty. Carl E. Wimberly, Judge.

DISPOSITION:

Decree affirmed.

CASE SUMMARY:

PROCEDURAL POSTURE: Appellantindividuals challenged the decision ofthe Circuit Court, Douglas County(Oregon), which entered judgment forappellee corporation in thecorporation's action to have a deeddeclared to have been a mortgage.

OVERVIEW: The corporation alleged thatthe one individual received a warrantydeed to land. The individual thenexecuted and delivered to the otherindividual a warranty deed purportingto convey to the named grantee anundivided one-half interest in thelands; but in fact the instrumentdelivered was delivered and acceptedonly as a mortgage to secure thepayment of a sum of money which wasloaned coordinately with the executionand delivery of the deed. Theindividuals contended that the trialcourt erred in decreeing thetransaction to have been one of loan

rather than absolute sale with optionto purchase. The court held that ifthe intent appeared that property wasconveyed as security for thefulfillment of an obligation, the formof the instrument was immaterial andthe true nature of the transactioncould have been shown by parolevidence. The court concluded that theprovisions of the instrument were

incompatible with any idea of sale andwere consistent with the idea of aloan. The court affirmed the judgment,holding that the fact thatnegotiations originated out of anapplicat ion for a loan tended tosupport the conclusion that the deedgiven was intended as a mortgage.

OUTCOME: The court affirmed thejudgment for the corporation, whichdeclared a deed executed to theindividuals to have been a mortgage.

CORE TERMS: tract, mortgage, deed,timber, plywood, repurchase, bonus,stamps, purchase price, conveyance,outright, stock, conveyed, one-half,assigned, recited, owing, preferredstock, deed absolute, timber land,negotiation, re-purchase, grantee,figured, joined, decree, apartmenthouse, declaration of trust, warrantydeed, defendants-appellants


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LexisNexis(R) Headnotes

Contracts Law > Debtor & Creditor

RelationsReal Property Law > Financing > Mortgages & Other Security Instruments

> Redemption > General Overview Real Property Law > Ownership &Transfer > Equitable Interests[HN1] A deed absolute on its face maybe shown to be a mortgage. In general,all persons able to contract arepermitted to determine and controltheir own legal relations by anyagreements which are not illegal, oropposed to good morals or to publicpolicy; but the mortgage forms a

marked exception to this principle.When the character of a mortgage hasattached at the commencement of thetransaction, so that the instrument,whatever be its form, is regarded inequity as a mortgage, that characterof mortgage must and will alwayscontinue. If the instrument is in itsessence a mortgage, the parties cannotby any stipulations, however expressand positive, render it anything but amortgage, or deprive it of theessential attributes belonging to amortgage in equity. The debtor or

mortgagor cannot, in the inception ofthe instrument, as a part of orcollateral to its execution, in anymanner deprive himself of hisequitable right to come in after adefault in paying the money at thestipulated time, and to pay the debtand interest, and thereby to redeemthe land from the lien and encumbranceof the mortgage; the equitable rightof redemption, after a default ispreserved, remains in full force, andwill be protected and enforced by acourt of equity, no matter what

stipulations the parties may have madein the original transaction purportingto cut off this right.

Contracts Law > Negotiable Instruments> Negotiation > Delivery Evidence > Documentary Evidence > Parol EvidenceReal Property Law > Financing >

Mortgages & Other Security Instruments> Definitions & Interpretation[HN2] If the intent appears thatproperty was conveyed and received assecurity for the fulfillment of anobligation, the form of the instrumentbecomes immaterial and the true natureof the transaction may be shown byparol evidence. Neither fraud, mistakenor accident need be proven. Theprimary inquiry relates to theintention of the parties at the timethe transaction was consummated.Mutual intent is to be determined, notalone by the instruments executed, butalso by the attendant circumstancesand the conditions under which theinstruments were delivered. The issuecan be resolved only after consideringthe situation of the parties, theprice fixed relative to the value ofthe property and the conduct of theparties, both before and after thetransaction, insofar as such conductprospectively or retrospectivelythrows light upon the intent of theparties at the time of thetransaction.

Civil Procedure > Equity > Maxims > General Overview Real Property Law > Financing >

Mortgages & Other Security Instruments> Definitions & InterpretationReal Property Law > Financing >

Mortgages & Other Security Instruments> Redemption > Mortgagor's Right[HN3] It is a maxim of equity that"once a mortgage always a mortgage."By this is meant that the character ofa transaction involving the conveyanceof property is fixed at its inception,and if at that time the conveyance isintended to operate by way of securityand as a mortgage, a mortgage it mustremain with all the incidents thereof

despite express stipulations to thecontrary in the instrument ofconveyance looking to the abrogationof the mortgagor's equity ofredemption.

Real Property Law > Financing > Mortgages & Other Security Instruments

> Definitions & Interpretation


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[HN4] If the grantor of a deedabsolute in form, but alleged to havebeen intended as a securi ty, wasfinancially embarrassed at the time ofits execution, being sorely pressedfor money and, therefore, at the mercyof his creditor and unable freely todictate the terms of his security,this circumstance will be consideredas tending to show the intention tocreate a mortgage.


> Definitions & Interpretation[HN5] Continued possession of propertyby a grantor is some evidence that aconveyance is intended as a mortgage.

Real Property Law > Deeds > Enforceability Real Property Law > Financing >

Mortgages & Other Security Instruments> Definitions & Interpretation[HN6] In determining whether a deedabsolute in form is a mortgage, therelationship between the considerationfor the conveyance and the value ofthe property is a materialcircumstance to be considered.


> Definitions & Interpretation[HN7] When a deed absolute in form, isaccompanied by an option torepurchase, the instruments must beconsidered together. The option doesnot of itself convert the transactioninto a mortgage, but it is acircumstance to be considered in favorof the existence of a mortgage.

Real Property Law > Deeds > Construction & InterpretationReal Property Law > Financing >

Mortgages & Other Security Instruments> Definitions & InterpretationReal Property Law > Financing >

Mortgages & Other Security Instruments> Formalities[HN8] Regardless of the view that maybe entertained as to the presumptive

character of a deed with a stipulationfor a reconveyance, or as to thestandard of proof necessary toestablish the instrument orinstruments as a mortgage, theauthorities are in general agreementin support of the proposition thatwhere the question presented iswhether the transaction is a mortgageor a conditional sale, asdist inguished from the questionwhether an unconditional sale isinvolved, evidence of a doubtfulimport will be construed in favor ofthe theory that a mortgage wasintended, so that in such case a deedwith a provision for a reconveyancewill be construed as a mortgage ratherthan as a conditional sale.

SYLLABUS:

Umpqua Forest Industries broughtsuit against Neenah-Oregon LandCompany, Orval C. Schaefer, Erma L.Schaefer, his wife, Edumund Stafford,Elizabeth Stafford, his wife, andothers, to have a deed declared to bea mortgage. A decree in favor of theplaintiff was entered by the CircuitCourt, Douglas County, Carl E.Wimberly, J., and the defendants OrvalC. Schaefer and Edmund Stafford andtheir wives appealed. The SupremeCourt, Brand, J., held that evidencesupported finding that transactionwhereby tracts of timberland wereconveyed by deed absolute in form,accompanied by option to repurchase,was intended as a mortgage, so thatgrantorhad right to redeem afterexpiration of time provided in theoption to repurchase.

COUNSEL:

M. N. Eben , of Portland, argued thecause and filed a brief for

defendants-appellants.Paul E. Geddes , of Roseburg, argued

the cause and filed a brief forplaintiff-respondent and defendants-respondents, Roseburg PlywoodCorporation and Herald A. O'Neill.

Edwin M. Murphy , of Roseburg,argued the cause for defendant-respondent, May Kruse. On the brief[***2] was Spencer W. Yates, of


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Roseburg.

Ray B. Compton , of Roseburg, arguedthe cause for defendant-respondent, ViFinch. With him on the brief wasHenry Arnold Peterson, of Tacoma,

Washington.

JUDGES:

Lusk, Chief Justice, and Brand,Belt, Bailey and Latourette, Justices.

OPINION BY:

BRAND

OPINION:

[*608] [**220] This is a suitwherein the plaintiff Umpqua Forest

Industries, a corporation, seeks tohave a deed declared to be a mortgage.Plaintiff alleges that it is the ownerof two tracts of timber land which aredescribed in the complaint, the firstof which we shall call the Krusetract, and the second, the Countytract. The complaint states that on orabout 24 February 1942 the defendantRoseburg Plywood Corporation, as thethen owner, executed and delivered tothe defendant Schaefer a warranty deedto said lands, the considerationstated therein being $ 6,714; that on

28 February 1942 the defendantSchaefer executed and delivered to thedefendant Stafford a warranty deedpurporting to convey to the namedgrantee an undivided one-half interestin said lands; that in fact theinstrument delivered to Schaefer wasdelivered and accepted only as amortgage to secure the payment of[***3] a sum of money which wasloaned by Schaefer to the PlywoodCorporation coordinately with theexecution and delivery of the deed. Itis further alleged that the instrument

denominated a warranty deed fromSchaefer to Stafford was intended byboth parties to be only an assignmentof a one-half interest in themortgage.

On 29 November 1946 the defendantsSchaefer and Stafford, who with theirwives are the only appellants, [*609]filed an amended answer admitting theexecution of the two deeds, but

denying that they were given assecurity for any loan; alleging thatsaid defendants are the sole owners ofthe two tracts in fee simple andasking to have the plaintiff's claimdeclared invalid and removed as acloud upon their title. Defendantsalso attempted to plead an estoppelwhich will be considered later. Theabstract shows that an answer andcross-complaint was also filed by ViFinch, and another by May Kruse. Thecase was placed at issue byappropriate answers and replies.After trial, the court held that thedeed to Schaefer was a mortgage andthe deed to Stafford an assignment ofa one-half [**221] interest in themortgage. Other provisions of thepleadings and decree [***4] will benoted as occasion may require.

After the events involved in thiscontroversy, and on 16 October 1943,the plaintiff Umpqua Forest Industrieswas incorporated for the purpose ofaccepting title to the rights of thePlywood Corporation and of O'Neill,trustee, and O'Neill and wifeindividually, and for the particularpurpose of prosecuting this suit. On18 October 1943 a warranty deed wasexecuted by the Plywood Corporation,O'Neill, trustee, and O'Neill and wifeindividually, to the plaintiff UmpquaForest Industries, conveying the twotracts of timber land involved in thissuit. On 28 November 1946 theevidence discloses that a specialmeeting of directors and stockholdersof the plaintiff corporation was held,all directors and stockholders beingpresent, and waiving formal notice, atwhich time a declaration of trustprepared by the attorney for theplaintiff was presented andconsidered. A resolution was passedauthorizing the execution of saiddeclaration of trust. On 29 November1946, pursuant to said resolution,[*610] the plaintiff Umpqua ForestIndustries executed and acknowledged adeclaration of trust wherein itdeclared that it holds the timberlands in [***5] question in trust forthe following uses and purposes:


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"1. To dispose of such landsin such manner and undersuch conditions as may beimposed upon it, if any, bythe Circuit Court of theState of Oregon for theCounty of Douglas. "2. Unless otherwisedirected by said CircuitCourt of the State of Oregonfor the County of Douglas orother court havingjurisdiction, to sell saidlands for the highest priceobtainable and from theproceeds thereof to satisfyand discharge the followingclaims:

(a) To pay any andall taxes nowlegally levied orassessed againstsaid premises andto repay anyperson, firm orcorporat ion whohas heretoforepaid to DouglasCounty any taxesupon said premisessubsequent toOctober 15, 1939. (b) To satisfy anddischarge toEdmund L. Staffordand Orval C.Schaefer and/orthe Common SchoolFund of the Stateof Oregon or otherperson, firm orcorporation as thecourt may direct,such sum as may befound owing tosuch persons orpublic body, ifany. (c) To pay unpaidaccounts ofRoseburg PlywoodCorporation to theRoseburg News-

Review, FraynPrinting Company,or other unpaidcreditors, if any,of saidcorporation. (d) To pay [***6]and dischargewhatever amount,if any, is found,by any courthavingjurisdiction ofcause in theCircuit Court ofthe State ofOregon denominatedUmpqua ForestIndustries vs.Neenah-Oregon LandCompany, owing todefendant thereinMay [*611] Kruseand/or to one W.J. Ross and/or oneCarmen Shelton. (e) To pay theprincipal andinterest uponstocksubscriptions

and/or stockcontracts andother valid claimsagainst RoseburgPlywoodCorporation, andin particular andwithout beingexclusive to paythe following: (1) FrankHammersmith andJoe Hammersmith of

Tacoma,Washington, $3,000.00.(2) Harry Wilson,Hoquiam,Washington, $500.00.(3) John F.Tumblson,McCleary,Washington, $


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550.00.(4) E. C. Einert,McCleary,Washington, $550.00.(5) Fred Kuny,Montesano,Washington, $500.00.(6) Nettie Nails,Hoquiam,Washington, $1000.00.(7) JosephineLarsin, Seattle,Washington, $1200.00.

The above are understood to beapproximate sums and this trust is to

pay the true sum which may beascertained.

(f) To repay to Herald A.O'Neill sums advanced by himto pay other stockholdersand for bills paid by him inthe business of saidRoseburg PlywoodCorporation, [***7] thesum of $ 12,100.00. (g) To pay the net remainingproceeds after satisfactionin full of the claims aboveset forth and any othervalid claims which may befound due and owing fromRoseburg [**222] PlywoodCorporation to any person,firm or corporation, orwhich may for any reason bea charge upon said realproperty, to [*612] thefollowing persons in thefollowing proportions:(1) Oscar A. Wirkkala, 71/2%.(2) Phoebe T. O'Neill, 231/8%.(3) Herald A. O'Neill, 231/8%.(4) Vi Finch, 46 1/4%."

For convenience, we shall refer toSchaefer and Stafford as if they werethe only defendants-appellants,although in fact their wives were

joined as defendants and have joinedas appellants. There are but twoassignments of error in the brief ofthe defendants-appellants, and onlythe first is of substance. They areas follows:

"I. The trial court erred indecreeing the transaction tohave been one of loan andsecurity rather thanabsolute sale with option topurchase."II. The trial court erredin refusing to decree anestoppel against Respondentsto assert the contentionthat said transaction wasone of loan and security."

Notwithstanding the fact that[***8] there are numerous parties, itappears to be agreed between theplaintiff-respondent and thedefendants-appellants that the entirecontroversy presents a single majorissue. From the appellants' brief wequote:

"* * * sole questionspresented by this appeal arewhether said transaction isone of sale or loan andsecurity and, if deemed the

latter, whether or notRespondents are estopped toassert the same.

"* * *

"* * * The contentions ofall other Respondents areidentical with that ofPlaintiff-Respondent, so faras this appeal is concerned,and all other Defendants-Appellants are assignees orgrantees, as the case maybe, of the Defendant-

Appellant, Orval C.Schaefer."

[*613] Likewise, the plaintiff-respondent, in its brief, afterstating its contention that the deedfrom the Plywood Corporation toSchaefer was a mortgage, makes thefollowing statement:

"* * * In spite ofvarious cross-complaints and


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other voluminous pleadings,and the many partiesinvolved, the other issuesof this case have beensettled throughstipulations, and we are nowconcerned only with this onequestion."

We will therefore proceed to aconsideration of the one issuepresented by [***9] the firs tassignment of error. The applicableprinciples of law are not greatly indispute. [HN1] A deed absolute on itsface may be shown to be a mortgage.The classic statement of the equitableprinciples underlying this rule isformulated by Pomeroy as follows:

"In general, all personsable to contract arepermitted to determine andcontrol their own legalrelations by any agreementswhich are not illegal, oropposed to good morals or topublic policy; but themortgage forms a markedexception to this principle.The doctrine has been firmlyestablished from an earlyday that when the characterof a mortgage has attached

at the commencement of thetransaction, so that theinstrument, whatever be itsform, is regarded in equityas a mortgage, thatcharacter of mortgage mustand will always continue.If the instrument is in itsessence a mortgage, theparties cannot by anystipulations, howeverexpress and positive, renderit anything but a mortgage,or deprive it of the

essential attributesbelonging to a mortgage inequity. The debtor ormortgagor cannot, in theinception of the instrument,as a part of or collateralto its execution, in anymanner deprive himself ofhis equitable [***10] rightto come in after a defaultin paying the money at the

stipulated time, and to paythe debt and interest, andthereby to redeem the landfrom the lien andencumbrance [*614] of themortgage; the equitableright of redemption, after adefault is preserved,remains in full force, andwill be protected andenforced by a court ofequity, no matter whatstipulations the parties mayhave made in the originaltransaction purporting tocut off this right.

"This doctrine is basedupon the relative situationof the debtor and the

creditor; it recognizes thefact that the creditornecessarily has a power overhis debtor which may beexercised inequitably; thatthe debtor is liable toyield to the exertion[**223] of such power; andit protects the debtorabsolutely from theconsequences of hisinferiority, and of his ownacts done through infirmityof will. The doctrine isuniversal in itsapplication, and underliesmany special rules ofequity. * * *" Pomeroy'sEquity Jurisprudence, Vol.4, 5th Ed., 1193.

Our decisions establish that [HN2]if the intent appears that propertywas conveyed and received as securityfor the fulfillment of an obligation,the form of the instrument [***11]becomes immaterial and the true natureof the transaction may be shown by

parol evidence. Neither fraud,mistake nor accident need be proven.The primary inquiry relates to theintention of the parties at the timethe transaction was consumated.Harmon v. Grants Pass Banking & TrustCo. , 60 Or. 69, 118 P. 188. Mutualintent is to be determined, not aloneby the instruments executed, but alsoby the attendant circumstances and theconditions under which the instruments


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were delivered. The issue can beresolved only after considering thesituation of the parties, the pricefixed relative to the value of theproperty and the conduct of theparties, both before and after thetransaction, insofar as such conductprospectively or retrospectivelythrows light upon the intent of theparties at the time of thetransaction. Libel et ux. v. Pierce ,147 Or. 132, 31 P. 2d 1106; Mattes etux. v. [*615] Smith et al. , 149 Or.93, 39 P. 2d 676; Conley v. Hendersonet al. , 158 Or. 309, 75 P. 2d 746;Colahan et al. v. Smyth et al. , 159Or. 569, 81 P. 2d 112; Harper v.Interstate Brewery Co. , 168 Or. 26,120 P. 2d 757; Murray v. Wiley et al. ,180 Or. 257, 176 P. 2d [***12] 243;Smith v. Headlee , 93 Or. 257, 183 P.20. These cases establish the generalrule. Decisions concerning theapplication of that rule to particularcircumstances will be cited asoccasion may arise.

As admonished by the authorities,we now examine the circumstancessurrounding the transactions for thepurpose of determining the intent ofthe parties.

May Kruse had long been the owner

of the Kruse tract, consisting of 320acres of timber land. Conforming tothe practice of the parties, we shallrefer to her by that name, although on4 January 1940 she was married toForrest Been. The timber is locatedabout five miles from the county roadwhich follows the South Umpqua riverin Douglas County. Road constructionto the tract would not have beenheavy, but a bridge across the riverwould have been necessary. The tractcontained an estimated 12 million feetof timber, but that quantity of timber

could not have been profitably loggedunless joined to a larger tract. TheKruse tract had been subjected toforeclosure by the county fordelinquent taxes, and shortly before16 October 1939, the period ofredemption was about to expire. MayKruse was without funds with which to[***13] redeem the property andconsulted Mr. W. J. Ross, an oldfamily friend. Mr. Ross consulted his

attorney, Herald O'Neill. Rossredeemed the property by payment tothe county of $ 664.10. O'Neill gaveRoss his personal note for one-half ofthat amount and the money was wired tothe county just before the expiration[*616] of the redemption period. MayKruse had never seen O'Neill, and infact, never did meet him until afterthe institution of the pendinglitigation. A deed was sent her,which she reluctantly, and under somepressure, signed. She had noknowledge concerning timber orbusiness transactions. The deed and atrust agreement were prepared byO'Neill. The deed recites that MayKruse, inconsideration of $ 10,conveys and warrants to "O'Neill,trustee" the Kruse tract. It is dated16 October 1939 and was recorded on 29April 1940. The trust agreement bearsthe same date. It recites that MayKruse, the trustor, is the owner ofthe Kruse tract; that she has deededit to O'Neill "as t rustee". Itfurther provides that the "absolutetitle to the trust estate" shall vestin the trustee and that:

"The trustee is herebyauthorized and empowered tosell the trust [***14]estate and/or the timbersituated thereon on suchterms and conditions as heshall determine.

"* * *

"* * * In general, thetrustee shall have everypower and discretion in thecontrol, management and saleof the trust estate that hewould have if he were the[**224] absolute ownerthereof, subject only to theexercise of good faith andcompliance with the terms ofthis agreement."

One-half of the beneficial interestwas vested in May Kruse; one-fourth ina beneficiary selected by Ross; andone-fourth in O'Neill. In the springof 1941, O'Neill and Robert McKeeverand Oscar Wirkkala examined the Krusetract and the adjacent County tract.The County tract which had been


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acquired by the county for delinquenttaxes was found available. The twotracts together comprised 1920 acresof timber lands and appeared to be agood "logging show". [*617] On 29August 1941 a contract of purchase wasexecuted between Douglas County asvendor and O'Neill, trustee, asvendee, covering the County tract, thetotal price being $ 4,500. In thistransaction O'Neill testified that hewas acting as "Herald A. O'Neill, astrustee for myself and Robert McKeeverunder articles of partnership [***15]between * * * us". The partnershipagreement was executed by O'Neill andMcKeever on the same day. It relatedto the promotion of the RoseburgPlywood Corporation, hereinaftercalled the Plywood Company. Also on29 August 1941 the articles ofincorporation of the Plywood Companywere filed and the corporation wasorganized. The officers were:O'Neill, President; Wirkkala, VicePresident; McKeever, Secretary; and R.L. Stitt, Treasurer. O'Neilltestified that he, individually, andas trustee, entered into a contractwith the Plywood Company concerningthe transfer of the properties andthat he did transfer them to theCompany, but the deed was not produced

at the trial and was never recorded.The contract was executed on 29 August1941. Among many other provisions,the contract recites that O'Neill "isthe outright owner of certain timberlands situated in Douglas County,Oregon." This undoubtedly refers tothe Kruse tract. O'Neill agreed "tocause to be transferred to the Companythose certain timber lands * * * nowof record in the name of Herald A.O'Neill, trustee." He also agreed totransfer the contracts of purchasebetween the county and himself, as

trustee, covering [***16] the Countytract. O'Neill never saw May Kruseuntil this litigation was institutedbut he claims that he discussed thematter with Mr. Been, then the husbandof May Kruse, and told him that theKruse tract was to be conveyed to thePlywood Company, but he was unable tostate positively whether he saw Beenbefore [*618] or after the executionof the deed to that Company. May

Kruse testified, concerning atelephone conversation, that "At onetime when I talked to him he said thathe had or was buying a tract of landso that we could put it all togetherand have a better chance to sell it."The evidence leads us to believe thatthis information was given after theKruse tract had been conveyed tothePlywood Company. O'Neill testifiedthat he told Been that the Krusetimber was being put into the Companyfor $ 10,000 of preferred stock andtwo shares of common stock for eachshare of preferred. There is noevidence that Mr. Been was authorizedto act as agent for May Kruse, exceptto the extent of seeking informationfor her on a few occasions. May Krusetestified that she informed O'Neillthat she did not want s tock, butwanted cash.

Concerning the proposed exchange ofthe [***17] Kruse timber for stock,May Kruse testified, "Well, hethought, he said that that was one wayout and I still maintained that he wasto sell the property and not give mestock for my sister and my estate. Itwas put up with the understanding thathe would sell it for cash and I wasn'thurrying him to sell it; I waswaiting." According to the plan withwhich O'Neill, as trustee, proposed toprotect the interest of hisbeneficiary, she was to receive inexchange for her one-half interest inher timber, $ 5,000 worth of preferredstock, out of a total of $ 800,000worth, all at the arbitrary andartificial value of $ 10 a share, plusone share of common for each twoshares of preferred stock. Whether inO'Neill' s plan, May Kruse was toreceive two shares of common for oneof preferred, as he said, or one shareof common for two of preferred, as healso said, is immaterial, for shenever received anything, either incommon or preferred stock, or cash.

[*619] [**225] This brings usto the relationship between O'Neill,Stafford and Schaefer. O'Neill andStafford were practicing attorneys inSeattle, Washington. They had officedtogether over different periods since1935. O'Neill [***18] testified:


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"* * * we formed anassociation under the nameof Flick, O'Neill &Stafford. We were partnersfrom a public standpoint butnot as far as our businesswas concerned -- I mean froma standpoint of division offees. There was apartnership with referenceto office overhead andgeneral expenses -- that wasdivided equally with theexception -- there was aslight amount paid by mebecause I had the largeroffice * * * That continuedunder the name of Flick,O'Neill & Stafford untilabout 1940 * * *".

They continued to office togetherwhen in town until February of 1943.Concerning the relationship betweenStafford and O'Neill, the lattertestified:

"A Whenever I came toSeattle -- my wife and threechildren were there -- thatwas my home -- I wouldprobably average during thatperiod a day a week in theoffice and whenever I was in

the office, naturally, Mr.Stafford wanted to know howI was getting along; all theArticles of Incorporationand everything were workedout in my office and I kepthim informed as to how I wasdoing in the organizationbecause he was interested inhow I was getting along.Our relationship was and hadbeen and continued very,very friendly, [***19]even after this suit had

been filed and there wasn'tanything that I did that Ididn't tell him. I lookedupon him as a close friendand confident.

"* * *

"Q At that time inJanuary, 1942, when youfirst contacted Staffordwith reference to an advance

of money to the corporation,did he or did [*620] henot know the status of thecorporation, its plans andexpectations?

"A He did; he knew of itfrom my original plans forthe financing.

"Q Did he know of that?A. Yes.

"Q How did he know of it?A. I told him completelyabout them."

Stafford advised O'Neill concerningprovisions of the Articles ofIncorporation.

By January 1942 the plan forselling $ 2,000 worth of preferredstock to each of the 200 skilledplywood workers, as a method offinancing the company, fell through,and in January 1942 O'Neill wasworking on a different plan involvingthe renting of machinery from theRobinson Manufacturing Company of thePuget Sound area. O'Neill testifiedthat proposed contracts with thiscompany were shown to Stafford andSchaefer. That there was somenegotiation with the Robinson Companyis established by an exhibit showingan estimated cost of constructionprepared by [***20] that company. Atthis time the defendant Schaefer was aclient of the defendant Stafford and ajoint venturer with Stafford in manytransactions. Schaefer was occupyingthe O'Neill and Stafford library ashis office. He was a dealer in realestate. Schaefer testif ied asfollows:

"Q Have you ever beenextensively engaged in thereal estate loan business?

"A Not extensively -- youmean with personal funds or--

"Q Personal funds? A.Not with personal funds, no.

"Q Have you ever been soengaged in a representativecapacity? A. Yes.


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[*621] "Q For somecommercial company?

"A Correct, acting asbroker and then working forloan companies.

"Q Have you had muchexperience in the loanbusiness? A. Considerably."

In January 1942 O'Neill hadnegotiated for a loan from one Jacksonfor $ 5,000 with a $ 1,000 bonus, andin reliance on the consummation of thedeal had written a post-dated checkfor $ 500. The lender backed out andO'Neill, in distress, informedStafford of the facts. O'Neill's rentwas delinquent for some months;telephone bills had piled up, andgeneral office accounts were overdue.In another transaction, O'Neill hadreceived $ 1,000 as earnest money[***21] on a deal for the sale ofPierce County property and had put themoney in his general account and hadspent some of it. His account was"virtually exhausted". Demand wasmade for the return of the earnestmoney and O'Neill went to Stafford.He explained to Stafford concerningthe proposed [**226] $ 5,000 loanwith a $ 1,000 bonus (the Jacksondeal). O'Neill testified Staffordsaid he couldn't handle it, but:

"* * * 'Perhaps Orval[Schaefer] could handle itbut it has got to be handledon a basis where he couldmake a fair rate.' I said,'Well, he can handle it onthe same basis as Jackson toget around the question ofthe rate of interest on thisdeal' and I said, 'We canplace the title in his nameand take the option back to

purchase at the additionalbonus of $ 1,000 and nothave his money tied upindefinitely and he said'Put it in writing'. I didthat and I put the letter onhis desk -- that is, I putit on Orval's desk becausehe told me to. Andfollowing that, why, Orvalcame into my own office and

he had the letter andattachments to the letter inhis hand and said, 'Herald,I am interested in [*622]this. Do you think this canbe worked out on this basis[***22] all right?' and Isaid, 'I don't see why itcan't.' And he said, 'Well,I want to look into i t alittle more.'"

O'Neill testified that on or aboutthe 16th day of January, 1942, $ 500was loaned by Mr. Schaefer to thecorporation. However, his own quotedtestimony shows that this $ 500 was aloan to O'Neill personally: "I was onthe spot because that $ 500 checkwould be coming through and so he gaveme a check for $ 500 so that I couldcover that check when it came throughat the bank." O'Neill appears to haveconsidered the Plywood Company as hisalter ego throughout. The lettersigned by O'Neill and placed onSchaefer's desk as suggested byStafford, was written on 16 January1942. It advised Schaefer concerningthe alleged assets and needs of thePlywood Company, and continued asfollows:

"We would like to secure

$ 5,000, and we are willingto deed this timber for saidamount; provided, however,we are to be given an optionto re-purchase same on orbefore six months for $6,000. We will undoubtedlyre-purchase before thattime, but we want to be sureto protect ourselves byallowing plenty of time.This would give the partymaking the advance a profitof $ 1,000 on [***23] a $

5,000 investment over amaximum period of sixmonths. If you can makethis deal, it will be a goodpiece of business for you,and at the same time, anaccommodation to us."

During the absence of Schaefer thepapers were prepared. O'Neilltestified:


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" A * * * I t o l d h i m Ineeded this money until thematter was concluded withRobinson and that I was notselling any more stock ofthe corporation. I didn'twant to sell any stock inthe corporation [*623]until that was completedbecause my plans had beenchanged and was no longergoing forward on the basisof stock sales and did notwant to sell any more stock;I merely wanted this loanuntil I could get through.

"* * *

"A * * * The Jackson

agreement was identical toPlaintiff's Exhibit L withthe exception that Jackson'sname was in it in place ofSchaefer 's and that wasdiscussed and Mr. Staffordwas given a copy showing theJackson contract and Iexplained to him what hadhappened to the Jackson deal-- that Judge Medley hadquestioned it from astandpoint of getting aroundthe statute.

"Q The statute of what?

"A The usury statute and,therefore, he didn't wanthis client to make the dealbecause it might result[***24] in litigation and Isaid to Ed I didn't see whywe couldn't work it out onthat basis. As I testifiedbefore, it is hard for menow to state, between thesevarious conversations,exactly when they occurred

but, as I previouslytestified, he said that hewasn't in a position tohandle it himself but, withthat kind of -- and on thattype of proposition, he feltsure Orval would beinterested, and to put it inwriting. I remember he toldBob, that is Mr. McKeever,to stay away from Orval in

connection with the matterand leave it up to himselfand me."

O'Neill testified that on hisreturn, Schaefer said:

"* * * he hadn't had timeto make enough investigationyet and that he would giveme $ 3,000 at that time andwe entered into a deal atthat time. Now theconferences between Mr.Schaefer and myself wouldnot be more than three atthe most. In other words,there was the time he cameinto my office with theletter and said he was

interested and [**227]could it be worked out --practically [*624] fromthere on it was handled byMr. Stafford. Mr. Schaefercame into the office, Ithink, when the final paperswere signed."

O'Neill had drawn an option inconnection [***25] with the Jacksonmatter and it was redrawn withSchaefer's name substituted. This"option to repurchase" was dated the--- day of January 1942 and was drawnas an agreement between the PlywoodCompany, therein described as"Roseburg" and "Schaefer". It recitedthat the company has deeded toSchaefer the Kruse tract, no mentionbeing made of any trust, and that ithad assigned the contract covering theCounty tract. It continued:

"WHEREAS, theconsideration for theaforesaid transfers fromRoseburg to Schaefer ispayment of the sum of Five

thousand dollars ($ 5,000),and the terms and conditionshereof:

"NOW, THEREFORE, it isagreed as follows:

"1. The aforesaid deedand assignment shall becomenull and void and saidproperty and contract re-transferred to Roseburg upon


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payment to Schaefer of thesum of Six thousand dollars($ 6,000). on or before theexpiration date hereof, andupon demand Schaefer agreesto place proper documents ofre-transfer in escrow withsuch bank or title insurancecompany as may be designatedby Roseburg underinstructions to release thesame to Roseburg or itsorder upon payment of Sixthousand dollars ($ 6,000)net for the account ofSchaefer."

[***26]

This instrument was introduced as anexhibit. It was signed by the PlywoodCompany, but not by Schaefer whorejected the option as written.

Stafford was acting throughout asagent for Schaefer. O'Neill testifiedthat the proposition was then madethat Schaefer "would advance $ 3,000at [*625] this time and take up thematter as to whether or not he wouldlet me have the additional $ 2,000later after he had more chance tocheck into it." On 6 February 1942 theparties closed the deal on the basisof $ 3,000 and executed an "option torepurchase" and delivered to Schaefera deed to the Kruse property and anassignment of the County contract. $2,500 was paid on that day, whichtogether with the $ 500 previouslyadvanced, made up the $ 3,000mentioned in the "option torepurchase" of 6 February 1942. Thedeed of the Kruse tract executed bythe Plywood Company to Schaefer makesno mention of the Kruse-O'Neill trust.The recited consideration is $ 10 andthere is nothing to show that revenuestamps were attached. The assignmentof the County contract on 6 Februaryis unique in that the Plywood Companysigns as the assignor of a contractbetween the county and O'Neill,[***27] Trustee. The revised "optionto repurchase" of 6 February 1942 hasa vital bearing upon the true intendednature of the transaction. In thisinstrument the Plywood Company is

designated "Roseburg". After recitingthe transfer of the Kruse tract, andthe assignment of the County tract, itcontinues:

"WHEREAS, the

consideration for theaforesaid transfers fromRoseburg to Schaefer ispayment of the sum of Threethousand dollars ($ 3,000),today in hand paid, receiptof which is herebyacknowledged by Roseburg,and the terms and conditionshereof;

"NOW, THEREFORE, it isagreed as follows:

"1. That the saidSchaefer shall investigatethe said timber and shouldhe find same as represented,to his satisfaction, he willadvance as a further paymentfor said timber as describedthe sum of Two thousanddollars ($ 2,000).

[*626] "2. The saidSchaefer does by thesepresents grant to the saidRoseburg Plywood Corporationan option to re-purchase the

said timber as describedherein for the total sum ofThirty-six hundred dollars($ 3,600), the said optionto extend to August 6, 1942,and unless exercised by saiddate shall expire andterminate, it being theunderstanding and agreement[***28] of said partiesthat should the saidSchaefer pay the additionalTwo thousand dollars ($2,000), then and in that

event the option purchaseprice shall be Six thousanddollars ($ 6,000). Uponnotice in writing of theintention of the saidRoseburg to exercise saidoption said Schaefer shalldeposit proper documents ofretransfer in escrow withsuch bank or title insurancecompany as may be [**228]


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designated by Roseburg,under instructions torelease in accordance withthe payments as provided inthis option.

"3. It is understood andagreed that Roseburg may logor cause to be logged any orall of the timber on theaforesaid property up to theexpiration date hereof;provided, however, no logsshall be removed and soldfrom said property withoutproper provision being madefor the payment direct toSchaefer of the reasonablestumpage price therefor. Inthe event of re-purchase,

any sums so paid to andreceived by Schaefer shallbe considered a credit uponthe aforesaid re-purchaseprice."

Stafford's testimony confirms thefact that $ 2,500 was advanced at thetime that the option was executed.

Contrary to the statements ofO'Neill, Stafford testified thatO'Neill and McKeever [***29] gave himvery little information concerning theproposed deal, but Stafford admittedthat both O'Neill and McKeever hadbeen in his office with severaldifferent propositions and that onseveral occasions O'Neill discussed[*627] with him the obtaining of aloan. Stafford testified that inconnection with the transaction of 16January 1942 (the letter from O'Neillto Schaefer) O'Neill solicited him,Stafford, for a loan, but he refusedto make one. Stafford furthertestified that O'Neill asked him if hewould try to interest Schaefer inmaking a loan but that he told O'Neillthat Schaefer would not be interestedin making a loan. He said, "I toldhim he wouldn' t be interested inmaking a mortgage loan on thatproperty." (Italics ours.) At the timeof the transaction of 6 February 1942and of the execution and delivery ofthe deed and the assignment of theCounty contract, Schaefer drew a checkfor $ 2,500 to Stafford, who sent it

to the bank and deposited it in the"Edmund Stafford, Attorney" account.Stafford then drew checks on thataccount as a means of disbursing thefunds which purported to be thepurchase price of the timber tracts.Although Stafford and O'Neill [***30]are in disagreement as to whosuggested the procedure, they bothagreed that the checks were drawn byStafford, and there is no substantialdisagreement concerning thedisbursement of the fund. O'Neilltestified:

"A * * * Mr. Staffordstuck me for, I believe, itwas two or three hundred --anyway that I got stuck foras a result of my

foolishness andimproperness, so that by thetime that he deducted thatmoney and the $ 500 and paidthe office rent and phoneand the phone bill was acouple hundred dollars,there was $ 200 and somedollars left; by refreshingmy recollection, I think Ican give you the exactfigure because I wrote itdown; there was $ 267.35which was left and Mr.Stafford gave me his checkfor that amount. That isthe amount of money which Ireceived personally from himthat was left from the $3,000.

[*628] "* * *

"Q Were any of theobligations that were paidby this means actuallyincurred by the corporation,such as telephone, officeand what not?

"A * * * they were allincurred by me in carryingon my law pract ice, as apracticing attorney in theCity of Seattle, with theexception of the longdistance calls which hadbeen incurred for thebenefit [***31] of thecorporation because there


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were a good many phone callsbetween the Roseburg Plywoodoffice in Roseburg and mySeattle office."

Here again O'Neill failed to

distinguish between himself and thecorporation which he whollycontrolled. The purported purchaseprice of $ 2,500 allegedly owing tothe Plywood Corporation, like theoriginal $ 500, was largely, if notwholly, paid on O'Neill's personaldebts, or else to him personally.

Since the deed to the Kruse tract,and the assignment of the contract forthe purchase of the county timber, andthe delivery of Schaefer's check for $2,500, all occurred on 6 February1942, we deem it necessary todetermine what the r ights of theparties were immediately after theconsummation of the deal. As said inBlackwell v. Johnson et al. , 127 Or.673, 273 P. 332, the time as of whichthe intent of the parties is to bedetermined is the time when theconveyance was made. Again, it issaid in Smith v. Headlee , 93 Or. 257,183 P. 20:

[HN3] "It is a maxim ofequity that: 'Once [**229]a mortgage always amortgage.' By this is meantthat the character of atransaction involving theconveyance of property isfixed at its inception,[***32] and if at that timethe conveyance is intendedto operate by way ofsecurity and as a mortgage,a mortgage it must remainwith all the incidentsthereof despite expressstipulations to the contraryin the instrument ofconveyance [*629] lookingto the abrogation of themortgagor's equity ofredemption. * * *"

If, on the 6th day of February, itwas the intention of the PlywoodCompany to sel l outr ight, and ofSchaefer to purchase outright, wewould expect the transaction, whichwas handled by lawyers, to state the

purchase price with definiteness. Theoption to repurchase does explicitlyset forth that "the consideration forthe aforesaid transfers from Roseburgto Schaefer is payment of the sum ofThree thousand dollars ($ 3,000) * **". But if $ 3,000 was theconsideration for the transfer of thetwo tracts, and if the transfer wasintended as an outright sale, then weare at a loss to understand why theparties should have provided furtherthat Scahefer should investigate thetimber "and should he find same asrepresented, to his satisfaction, hewill advance as a further payment forsaid timber as described the sum ofTwo thousand dollars ($ 2,000)." Theuse of the word [***33] "advance" ismost significant, but it is impossiblefor us to believe that an experiencedreal estate dealer and loan operator,under the advice of his agent andattorney, would buy property for $3,000 and then solemnly contract thatif he found what he had bought to beto his satisfaction he would pay $2,000 more as purchase price. On theother hand, if the $ 500 was a loan,as it was, and if the $ 2,500 was aloan, and if Schaefer desired toinvestigate further before lending theadditional $ 2,000 which would havemade up the total of $ 5,000, theamount for which O'Neill wasoriginally negotiating, then it isentirely understandable that he mighthave provided that he would advancethe additional $ 2,000 only afterfurther investigation. Stafford'sexplanation is in our opinionpreposterous. [*630] He testified:

"Q What was theunderstanding between theparties to this instrumentat the time of the executionof this option of February6th as to what would happenif this additional $ 2,000was not advanced?

"A It was understood thatit was sold.

"Q Then the $ 2,000 waspurely a matter of a giftfrom Schaefer to Roseburg


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Plywood, if he wanted tomake it, is that it?[***34]

"A Oh, yes, that is whatit amounted to; that was put

in there at the insistenceof Mr. O'Neill and did not,in fact, affect theinstrument for the sale."

The testimony of the defendantSchaefer was taken by deposition inSeattle prior to the trial andportions thereof were introduced bystipulation and constituted admissionsagainst interest by that defendant.We quote from the transcript of thiscase the stipulated testimonypreviously given by the defendant

Schaefer:"Mr. Geddes: Commencing

on line 2 of page 329, thefollowing questions werepropounded by Mr. Comptonand the answers given by thedefendant Schaefer asfollows:

"'Question: You were notinterested in making a loanwhere there was six or sevenpercent interest orsomething of that kind to be

paid on it?"A Well, I made very many

of them at six or sevenpercent.

"Q Well, in thisparticular instance you werenot interested in a loan?A. I was not interested in aloan, no.

"Q You were interested inthe business propositionhere of advancing themmoney, if you could make the20% specified in thesevarious documents?

"A After considerablethought, correct, -- afterconsiderable thought.

[*631] "Q But [***35]you were not interested inmaking a loan where you gotthe normal six or seven

percent or five and a halfor whatever the rate was atthe time, -- return ofinterest on this security?

"A Not a gamble like

that, no."Q And you were

interested in the sameamount of money in thegamble provided, asspecified in this letter andin the options torepurchase, there was aprofit such as set forththerein to yourself?

"A I think theinstruments speak forthemselves.

[**230] "Q But answerme, -- you were interestedif you would make thatprofit?

"A If I made a profit Ithought was in accordancewith the chance and gambleof the investment, correct.

"Q And that is why thematters were put in the formin which they were put?

"A What matters do youmean?

"Q Well, the documents inthe form in which they wereput in order that you mightmake that kind of a profit?

"A Correct.'

"Mr. Geddes: On page 332of the transcript of thedepositions, commencing withline 16 and ending with line20, the following questionwas propounded by Mr. Geddes

and answered by thedefendant, Mr. Schaefer, asfollows:

"'Q Now, from all ofthose investigations, whatwas your conclusion as tothe approximate [***36]value of those timber landsat that time?


17/25

"A Personally, I figuredthe money I was loaning wasenough.'"

When questioned by his attorneyconcerning his previous testimony that

he figured the money he was "loaning"was enough, Schaefer testified, "Theonly explanation I can make in thatconnection is that it was merely aslip of the tongue."

[*632] The proposal made byO'Neill was modeled upon the Jacksondeal which was to constitute a $ 5,000loan with a $ 1,000 bonus; in otherwords, a bonus of 20 per cent. WhenSchaefer decided that $ 3,000 was allhe would put up, it is significantthat the option to repurchase provided

for a "repurchase" price of $ 3,600,or a bonus of 20 per cent. Again, asprovided in said option to repurchase,if Schaefer elected to advance thefurther sum of $ 2,000, then he was toreceive as the repurchase price, $6,000, again giving a bonus of 20 percent. These transactions do not, inour opinion, remotely resemble thetype of agreement which is made whenone party is buying and the other issell ing outright, regardless ofwhether there be an option torepurchase or not.

The written and oral evidence whichconclusively demonstrates the method[***37] by which the so-calledrepurchase price was determined ineach of the various proposals,constitutes, in our opinion,persuasive evidence that the partiesintended that the conveyances shouldstand as security for the repayment ofmoney loaned plus a bonus. These menwere not babes in the financial wood.They were hard-bitten traders lookingfor big profits. They knew that thepayment of 20 per cent profit for sixmonths use of money, i. e., 40 percent per annum, would be usurious andthey attempted, without success, inthe instrument of 6 February, to throwthe deal into a form which wouldinsure the desired return withoutshowing the illegal purpose. Theprovisions of the instrument of 6February are incompatible with anyidea of sale and are consistent withthe idea of a loan.

Numerous other circumstances, whileseverally conclusive, do confirm theforegoing conclusion when [*633]considered together. The fact thatnegotiations originated out of anapplication for a loan tends tosupport the conclusion that the deedgiven was intended as a mortgage.O'Briant v. Lee , 214 N. C. 723, 200 S.E. 865; 1 Jones on Mortgages, 8th Ed., 401, p. 496. The parties agreethat [***38] this transaction did sooriginate.

The authorities support thefollowing rule:

[HN4] "If the grantor ofa deed absolute in form, butalleged to have beenintended as a security, wasfinancially embarrassed atthe time of its execution,being sorely pressed formoney and, therefore, at themercy of his creditor andunable freely to dictate theterms of his security, thiscircumstance will beconsidered as tending toshow the intention to createa mortgage." 59 C. J. S.,Mortgages, 42, p. 78;


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Caro v. Wollenberg, 68 Or.420, 136 P. 866; Smith v.Headlee, 93 Or. 257, 183 P.20.

O'Neill and his company were

certainly in straightenedcircumstances when he sought the loanand when he closed the deal on 6February. It is established that[HN5] continued possession of propertyby the grantor is some evidence thatthe conveyance was intended as amortgage. 1 Jones on Mortgages, 8thEd., 402, p. 496; 5 Tiffany, RealProperty, 3d Ed., 1396, p. 263.The provision permitting the PlywoodCompany to log the tract during theperiod [**231] of purported optionpresents an analogous situation.

Options given by an owner of timber toa prospective logger, ordinarilycontain specific provisions [***39]as to the terms and conditions of saleand payment. Here, however, we haveonly a provision that the allegedoptionee shall pay the reasonablestumpage value, credit to be givenagainst "repurchase price" if there isa repurchase.

The business, social, or otherrelationship is a circumstancerelevant to the main issue. Corey v.

Roberts , [*634] 82 Utah 445, 25 P.2d 940. This transaction was betweenintimate associates. The bonus ofeither $ 600 or $ 1,000 was presumablyto come out of funds to be securedfrom the public by the promoters,there being no other possible source.A device for the purpose of avoidingthe usury laws might succeed underthese conditions while it would bewell-nigh impossible between strangersdealing at arm's length.

We think it reasonable to assumethat one making an outright purchaseof 1920 acres of timber land wouldmake careful investigation concerningthe title of the vendor and the rightto convey. In t wo previousdepositions, Stafford stated that heknew O'Neill was holding the Krusetract as trustee. He saw the minutesof the meeting of the Plywood Companywhich disclosed the same fact. Stilllater, but before 6 February 1942, he

[***40] saw an opinion of titlecertifying that the title was vestedin O'Neill, Trustee, yet he insistedat this trial that O'Neill "never didtell me about a trust". Stafford'stestimony on deposition before trialestablishes that he knew of theexistence of the trust, but he nevereven asked to see the instrument whichcreated it. Stafford showed noconcern over the fact that the allegedpurchase price of the timber was usedin large measure to pay O'Neill's lawoffice obligations, for which Staffordhimself may have been secondarilyliable. The county contract alsostood in the name of O'Neill, Trustee,yet there is no evidence that thealleged purchaser made anyinvestigation. It was not until thespring or early summer of 1942 thatStafford discovered that taxes fromthe year 1939 on were due and unpaidon the Kruse tract. We might alsoassume that if defendants were makingan outright purchase with no legalassurance of any repurchase, theywould have [*635] made someinvestigation concerning the value ofthat which they were buying.Defendant Stafford, however,testified:

"Q Did you have anyknowledge as to the value ofthis timber at the time youconsummated thistransaction? [***41] A.No, other than the valuesthat he had paid for them.

"Q And you knew what thatwas? A. Yes."

It is generally held:

[HN6] "In determiningwhether a deed absolute inform is a mortgage, the

relationship between theconsideration for theconveyance and the value ofthe property is a materialcircumstance to beconsidered." 59 C. J. S.,Mortgages, 41.

The application of the foregoing testin the pending case presents


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testimony of McKeever, as follows:

"A * * * Herald told himthat the Jackson loan hadblown up and that he waspretty desperate and he laid

the proposal that he hadgiven to Jackson down;Jackson had taken it andbrought it back in theinterval; and they got intoa discussion over it andStafford finally says thathe thought a loan like thatcould be worked out and thata loan in that form wouldsatisfy Orval or pacify him,one or the two, and then Mr.Stafford turned around to meand I was looking out the

window and [***45] he said,'I don't want you to discussthis with Orval in anyrespect; we don't want youto say anything about it.'

"* * *

"Q Well, at that time intalking about thistransaction, [*638] Mr.Stafford stated that a loanin that form would satisfyor pacify Orval?

"A That was thestatement; yes, sir.

"Q He used the term'loan'? A. Yes, sir,because the Jackson deal wasdefinitely a loan and it wasthe Jackson papers that waslaid down there for the $5,000 on it. The reason Iwas in the office thatmorning was that I thoughtthe Jackson loan would becompleted by then and I camein to find out about it."

Stafford testified that McKeever'stest imony was false and that theproposal prior to 6 February 1942 wasfor a sale with an option torepurchase.

After the closing of the deal on 6February 1942, the deed to the Krusetract and the assignment of the countycontract were sent to the county clerk

of Douglas County for recording. Thecontract with the county contained theprovision that it could not beassigned without the consent of the[**233] county. Stafford testifiedthat about two weeks after theinstruments were mailed, he wasinformed that the county clerk [***46]refused to place the assignment ofrecord. Stafford then told O'Neillthat he would advise Schaefer to payoff the county. O'Neill testifiedthat he objected to this proposalbecause the contract required apayment of only $ 400 a year for nineyears and he did not want theobligation paid in advance of its duedates. Stafford, however, insisted,and O'Neill finally agreed. Accordingto Stafford's testimony he contactedSchaefer:

"A * * * and went to thebank and got a cashier'scheck for $ 3708, as Irecollect, and came back andgave it to Mr. O'Neill inorder to get the transactioncompleted.

"Q Did that checkcomplete the payment on theDouglas County contract?

"A It did.

[*639] "Q And statewhether or not subsequentlya deed issued in due coursefrom the county? A. Yes,there was."

O'Neill came to Roseburg with thecheck, paid off the county, and took adeed from the county to the PlywoodCompany, although the contract hadalready been assigned to Schaefer.That deed was executed on 4 March andrecorded on 6 March 1942. BeforeO'Neill went to Roseburg to pay offthe county, a new deed had beenexecuted bearing the date of 24February 1942, which, however,[***47] was not recorded until 17March 1942. In this deed the PlywoodCompany was grantor and Schaefergrantee. It recites that theconveyance is in consideration of $6,714 in hand paid. The actual amountof the balance of purchase price owing


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to the county, as stated by Stafford,was $ 3,708. It is not difficult todetermine how the parties arrived atthe figure $ 6,714, which is recitedas the consideration for the deed fromPlywood to Schaefer, and which coveredthe property which had previously beendeeded or assigned to him. If we addthe following items: $ 500 loaned toO'Neill; $ 2,500 paid on 6 February; $3,708 paid the county; and $ 7.70revenue stamps on the deed of 24February from Plywood to Schaefer, wereach the total of $ 6,715.70. Thereappears an immaterial discrepancy of $1.70 between the amount paid out andthe consideration recited in the deedfrom the Plywood Company to Schaefer.On his return from Roseburg, O'Neillwas given a new instrument describedas option to purchase. It was alsodated 24 February and recited $ 1.00and other valuable consideration andfixed the purchase price at $8,063.60. O'Neill stated that he hadnothing to do with fixing that [***48]figure. He testified that Schaefersaid to him, "'Herald, we just [*640]figured that bonus out on the samepercentage or condition -- I don'tknow whether he said bonus orpercentage -- but figured that out onthe same basis -- that is okay isn't

it?' There wasn't anything I couldsay, so that is all." Strangelyenough, Stafford also testified:

"Q How was the figure of$ 8063.60, mentioned in theoption of February 24th,being Plaintiff's Exhibit P,arrived at? Did you figurethe amount?

"A Whether it was myselfor Mr. Schaefer -- I don'tknow.

"Q How did you computethat amount? A. That Idon't know either. I knowwe figured the cost of doingbusiness -- Schaefer did,and that was the sum thatwas added -- whether it wasbased on what apparently is20% or not, I don't at thistime recollect.

"Q Considering the

revenue stamps, that figuresout to just about exactly20% over and above the $6714, doesn't it? A. It mayhave. As I say, I have nodefinite recollection; itapparently was based onthat."

It will be recalled that theoriginal proposal was for a $ 5,000loan and a 20 per cent bonus.Thereafter the parties closed on a $3,000 alleged purchase price to[***49] Schaefer and a 20 per centbonus or $ 600 with the repurchaseprice fixed at $ 3,600, or in thealternative, it provided for a furtheradvance of $ 2,000 and a 20 per centbonus of $ 1,000. Finally, on the

basis of a recited consideration of $6,714 paid by Schaefer, the "resale"price was $ 8,063.60 Twenty per centof $ 6,714 is $ 1,342.80. If we addthat amount as a 20 per cent bonus tothe amounts paid by Schaefer, we reachthe figure $ 8,056.80, which camewithin $ 6.80 [**234] of therepurchase price fixed in the lastoption. The discrepancy is probablyexplained by some calculationconcerning revenue stamps.

[*641] We think it is

conclusively established that therewas no bargaining between the partieson the basis of the value of theproperty, and throughout the entiretransaction, the controllingconsideration on both sides was thatSchaefer should have a 20 per centprofit for the use of his money.Other considerations lead to theconclusion that the parties were, inreality, seeking to disguise ausurious loan as a sale. We refer toStafford 's apprehension when itappeared that the so-called option

would not be exercised, and to thecontinued efforts of both [***50]parties to dispose of the propertyafter the six months period of theoption had expired. Staffordtestified that O'Neill talked aboutpurchasing it back a number of times.Stafford said: "A * * * I told him themoment he had any cash, come on and wewould still talk business. When hefirst expressed himself as that this


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transaction was a loan, I don't place- - - Q You don't know? A I don'treally remember." In a letter writtenby Stafford to O'Neill on 8 January1945, and therefore post litem motam,Stafford repeatedly denied that thetransaction constituted a mortgage,but he also said; "Whether or not thedeed which you gave as a result of thenegotiation, might be interpreted as amortgage, is a problem for courts, andof course depends largely on thestatements made at the time of thetrial. * * * Orval and I travelled toEugene with McKeever, at my instance;again in order to affect a possiblesaving for you." This trip to Eugenewas made after expiration of the sixmonths period.

It is significant that the final"option" gives the right of repurchasefor six months from 6 February 1942,the date of the $ 3,000 option torepurchase, and not from 24 February,the date of [***51] the final option.[*642] Stafford testified that thetwo options and the transfers anddeeds all constituted one transaction.We are justified in determining thenature of the transaction as of 6February 1942.

[HN7] When a deed absolute in form,

is accompanied by an option torepurchase, the instruments must beconsidered together. The option doesnot of itself convert the transactioninto a mortgage, but it is acircumstance to be considered in favorof the existence of a mortgage. Davisv. Stewart , 53 Cal. App. 2d 439, 127P. 2d 1014; Powell v. Huffman , 358 Mo.138, 213 S. W. 2d 473. In Grover v.Hawthorne Estate , 62 Or. 77, 114 P.472, 121 P. 808, and in Mattes v.Smith , supra, deeds absolute in formwere held to be mortgages when

accompanied by options to repurchase.See also Caro v. Wollenberg , supra.

The leading case on this point isConley v. Henderson, et al. , supra. Itbears a striking resemblance to thecase at bar, though in some respectsit is weaker, and in others, strongerthan the one presently before us. Theplaintiff Conley conveyed toHenderson, timber land and an

apartment house as a singletransaction. Conley had previouslycontracted [***52] to purchase theapartment house, but was unable tomake payment. He obtained $ 5,500from Henderson and used the money inpayment for the apartment house, whichwas deeded to an intermediate grantee,and then to Henderson. Thetransaction, as in the case at bar,had its origin in an application toHenderson for a loan of $ 5,500 for 60days, with a bonus of $ 1,000 formaking the loan. As in the case atbar, the applicant was in straightenedcircumstances and, as in this case,Henderson refused the loan. Conley'srepresentative then proposed toHenderson that a deed be executed,conveying both [*643] properties toHenderson and that Henderson advancethe $ 5,500, not by way of a loan, butas a sale, with an option torepurchase at $ 6,500. The granteetestified, as here, that his intentionwas to make an outright purchase,giving only a contract for repurchase.Conley, however, understood thetransaction as a loan of the money.On the advice of his lawyer, andbecause the negotiations hadoriginated in an application for aloan, and to prevent Conley from ever

claiming an interest in the property,the transaction was split up. Theconveyances and escrow agreements were[***53] [**235] delivered on 5November and the contract ofrepurchase was signed a week later.The latter agreement, as drawn, gavean option to repurchase to Henderson'sattorney, DeFrancq, and read in partas follows:

"* * * The purchase priceshall be the sum of $6500.00, with interestthereon at the rate of 7%per annum from the datehereof, plus any paymentsupon the principal orinterest of the mortgagethen upon said propertiesmade by S. E. Hendersonsubsequent to the datehereof. In the event suchoption is exercised,however, the said Harry J.


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DeFrancq and assigns shallbe credited on such purchaseprice with the income ofsaid properties, if any,actually collected from thedate hereof to the time saidoption is exercised, afterdeducting therefrom expensesof operation of saidproperties, including 5% ofthe gross receipts as amanagement fee."

The option was then assigned toConley. Conley paid for revenuestamps and for recording the deeds.The escrow agreement which wasassigned to Conley provided that uponnotice to the escrow holder that thetitle was satisfactory to Henderson, $5,500 should be paid to Conley and thedeeds should be delivered toHenderson. [***54] The provision fora $ 1,000 bonus is almost identical tothat in the case at bar. Unlike thecase at [*644] bar, Henderson tookpossession of the apartment house. Asin the case at bar, the partiesconsulted together concerning themanagement and disposition of theproperty after the date of the option.The value of the property was greatly

in excess of the amount advanced byHenderson, which is probably trueconcerning the advances made in thecase at bar. As in the case at bar,no note or direct written evidence ofindebtedness was ever executed. Thiscourt held that the deeds were in factmortgages, and in language peculiarlyapplicable to the case at bar said:

"Again, it must beremembered that the dealingsbetween Conley and Hendersonoriginated in an applicationfor a loan and in an offerby Conley to pay Henderson abonus of $ 1,000 for makingthe loan, and that, when thedealings were consummated,the payment of this bonuswas made a condition in thecontract of repurchase. Thiscircumstance, whenconsidered in connectionwith other testimony which

shows that the negotiationsbetween Conley and Hendersonwere never broken off butwere carried on from time to[***55] time and, whenfinally consummated bymaking of these conveyancesand a contract ofrepurchase, still requiredConley, if he exercised hisoption, to pay Hendersonthat amount as a bonus. Thiscircumstance alone stronglytends to show that thetransaction was a loan andnot an absolute sale and,when all the matters abovereferred to are consideredand effect is given to thevarious writings signed byHenderson, to which we havereferred, the transactioncannot reasonably beexplained upon any otherhypothesis than that theconveyances in question wereintended as security for thepaymentof a debt.

The fact that revenue stamps wererequired on outright deeds, but not ondeeds intended as mortgages, [*645]and the fact that Conley paid for therevenue stamps, was considered by thecourt, but his conduct in that respectwas thought to be explained by othercircumstances and consequently, noinference adverse to his claim wasdrawn. In the case at bar, the recordfails to show that any revenue stampswere affixed to the instrumentsdelivered on 6 February when the dealwas closed. It was only when on 24February the Plywood Company executeda deed covering the tracts which[***56] had previously been conveyedor assigned, that revenue stamps wereaffixed. The deed whereby Schaeferconveyed an undivided one-halfinterest in the two tracts to Staffordon 28 February 1942 carried no revenuestamps. The expense of the revenuestamps on the deed of 24 February wascharged against the Plywood Companyonly in the sense that the cost wasadded by the defendants to therepurchase price. We think theevidence concerning the revenue stamps


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is no more persuasive against theplaintiff here than it was in theConley case. We refer to the numerousauthorities cited in the Conley case,without repeating them here.

Stafford, who handled the entiretransaction, and took an assignmentfrom Schaefer, cannot claim any rightswhich [**236] would place him in abetter position than that of hisprincipal. The defendants' claim ofan estoppel is without merit. Thedefendants participated in theintention to disguise a securitytransaction as an outright conveyancefor the purpose of securing anexcessive profit on a loan. Thisprecludes them from any right to claiman equitable estoppel.

We recognize that a deed absolutein form is presumptively what i tappears to be and [***57] thatevidence must be clear, consistent andconvincing to warrant [*646] anyfinding that such a deed is in effecta mortgage. Nevertheless, thepreponderance of the evidence ruleapplies for, while recognizing therule requiring clear and convincingevidence, the authorities in this andother states have also approved therule applying peculiarly in courts of

equity.[HN8] "Regardless of the

view that may be entertainedas to the presumptivecharacter of a deed with astipulation for areconveyance, or as to thestandard of proof necessaryto establish the instrumentor instruments as amortgage, the authoritiesare in general agreement insupport of the propositionthat where the questionpresented is whether thetransaction is a mortgage ora conditional sale, asdistinguished from thequestion whether anunconditional sale isinvolved, evidence of adoubtful import will beconstrued in favor of thetheory that a mortgage was

intended, so that in suchcase a deed with a provisionfor a reconveyance will beconstrued as a mortgagerather than as a conditionalsale. * * *" 36 Am. Jur.,Mortgages, 173, p. 776.

And see Stephens v. Allen, et al. , 11Or. 188, 3 P. [***58] 168; Elliottv. Bozorth , 52 Or. 391, 97 P. 632;Kinney v. Smith , 58 Or. 158, 113 P.854; Bickel v. Wessinger , 58 Or. 98,113 P. 34; 4 Pomeroy, EquityJurisprudence, 5th Ed., 1195, p.576; 5 Tiffany, Real Property, 3d Ed., 1397, p. 266; 1 Jones on Mortgages,8th Ed., 294, p. 345.

In conclusion, we find that O'Neillviolated his duty as trustee to MayKruse. In effect, he conveyed herproperty to himself and gave hernothing for it. We find that thedeeds to Schaefer were, in effect,mortgages. Much of the evidence wascircumstantial and questions ofcredibility of witnesses were directlyinvolved. We approve the statementfrom Powell v. [*647] Huffman ,supra, to the effect that in cases ofthis kind "* * * The facts and

circumstances of each case are alwayscarefully examined, deference beingaccorded to the findings of the trialcourt after a hearing upon the merits* * *." The decree of the trial courtprovides that there is now due andowing from the Plywood Corporation tothe defendants, Stafford and Schaefer,$ 6,714 with interest at 6 per centfrom February 24, 1942, together withother sums with like interest, paid bythem for taxes and protection [***59]of the property; and provides that themortgaged property be sold, as

provided by law, for the satisfactionof the judgment of the defendantsagainst the Plywood Corporation. Noappeal was taken by the plaintiffs.The decree also wisely provided thatthe trial court will retainjurisdiction for the purpose offulfilling the provisions of thedeclaration of trust executed by theplaintiff. The decree is affirmed.


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umpqua forest ind. v. neenah-ore. land co., 188 or. 605, 217 p.2d 219 (1950)

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