5. Which of the following best states the parties' rights in Blackacre?

Now, the owner has defaulted on repayment with $55,000 still due on the loan. The owner is still in possession.

The owner of Blackacre needed money. Blackacre was fairly worth $100,000, so the owner tried to borrow $60,000 from a lender on the security of Blackacre. The lender agreed, but only if the owner would convey Blackacre to the lender outright by warranty deed, with the lender agreeing orally to reconvey to the owner once the loan was paid according to its terms. The owner agreed, conveyed Blackacre to the lender by warranty deed, and the lender paid the owner $60,000 cash. The lender promptly and properly recorded the owner's deed.

The lender's oral agreement to reconvey is invalid under the Statute of Frauds, so the lender owns Blackacre outright
The owner, having defaulted, has no further rights in Blackacre, so the lender may obtain summary eviction
The attempted security arrangement is a creature unknown to the law, hence a nullity; the lender has only a personal right to $55,000 from the owner
The lender may bring whatever foreclosure proceeding is appropriate under the laws of the jurisdiction

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A security interest in real estate operates to secure some other obligation, usually a promise to repay a loan, which is represented by a promissory note. If the loan is not paid when due, the holder of the security interest can either take title to the real estate or have it sold and use the proceeds to pay the debt with accrued interest and any legal and court costs.

A landowner needing to raise money may «sell» the land to a person who will pay cash and may give the «buyer» an absolute deed rather than a mortgage. This may seem to be safer than a mortgage loan to a creditor and may seem to have tax advantages. However, if the court concludes, by clear and convincing evidence, that the deed was really given for security purposes, they will treat it as an «equitable» mortgage and require that the creditor foreclose it by judicial action, like any other mortgage. This result will be indicated by the following factors: (i) the existence of a debt or promise of payment by the deed's grantor; (ii) the grantee's promise to return the land if the debt is paid; (iii) the fact that the amount advanced to the grantor/debtor was much lower than the value of the property; (iv) the degree of the grantor's financial distress; and (v) the parties' prior negotiations.

D is correct. The lender does not own Blackacre outright; he holds an equitable mortgage. Because the lender's interest is a mortgage on the property rather than outright ownership of it, his only remedy following the owner's default is foreclosure of the property pursuant to the equitable mortgage.

A is incorrect. The agreement to reconvey is not a land sale contract and is therefore not subject to the Statute of Frauds.

B is incorrect. A court must determine the rights of a mortgagor and mortgagee in relation to a default on the mortgage, and the vehicle for that determination is a foreclosure proceeding, not an eviction proceeding.

C is incorrect. The arrangement is an equitable mortgage, not a nullity.

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5. Which of the following best states the parties' rights in Blackacre?

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