Homestead; Mortgages

Equitable Bank, SSB v Chabron, 238 Wis2d 708, 618 NW2d 262 (Wis Ct App 2000).

Facts: The Chabrons decided to develop their property into a condominium project. The McDonalds contracted to purchase one of the units and paid the Chabrons $225,000. Before their unit was complete the McDonalds rescinded the contract and demanded a full refund. When the Chabrons did not refund the money, the McDonalds filed suit for breach of contract. At trial, the parties made an in-court oral agreement that the Chabrons would repay $300,000 to the McDonalds, thereby resolving the case. The parties later disagreed about the terms of the agreement and the Chabrons refused to pay. Meanwhile the Chabrons failed to make mortgage payments on their property and Equitable Bank (Equitable) filed a foreclosure action.

The McDonalds sued Equitable, arguing that the in-court stipulation gave them a lien prior to that of Equitable. The court found that Equitable's lien had priority. Before the sale the court recognized one of the units as the Chabrons' homestead. When the Chabrons were unable to reclaim the property during the redemption period, the property was sold at a sheriff's sale to the highest bidder, the McDonalds, for $550,000. From the sale, a surplus of $132,000 was left after payment of the mortgage note. The Chabrons argued that the homestead exemption entitled them to $40,000 of the surplus. The McDonalds claimed the entire surplus arguing that the in-court stipulation constituted a mortgage to which the homestead exemption did not apply. The lower court agreed with the McDonalds. The Chabrons appealed.

Holding: Affirmed in part, reversed in part. Homesteads are exempt from judgment liens but not from mortgage foreclosures. Although Wis Stat 706.02, which explains the requirements for a property conveyance, requires among other things that the conveyance be signed by all of the parties, formal documentation of a mortgage is not necessary when the purported conveyance has all of the characteristics of a classic mortgage. The Chabrons' in-court stipulation had all of the requisite "mortgage ingredients: (1) the conveyee's interest was expressed as a lien; (2) the lien attached to specific property; (3) the lien was a guarantee that a certain sum of money would be paid; (4) interest was earned on the debt; and (5) the debt had a due date." The most compelling and controlling characteristic is that the purpose of the instrument or transaction was security for money. It was the McDonalds' security to exact the refund from the condo investment.

The Court of Appeals affirmed the trial court's determination that the stipulation was a mortgage. However, the Court reversed the decision that the Chabrons were not entitled to their homestead exemption. There is a strong public policy interest in protecting the homestead and the Chabrons have a substantive right in the upholding of the signature requirement for conveyances of their homestead. Since the Chabrons never signed a document conveying their interest in the homestead, the in-court stipulation cannot be construed as a mortgage for homestead purposes. Therefore the Chabrons were entitled to the $40,000 homestead exemption.

EDITOR'S NOTE: Under Illinois law, real estate can still qualify for the homestead exemption when the owner resides on one portion of the lot and leases the remainder to others. Proviso Township H. S. Dist No 209 v Hynes, 84 Ill 2d 229, 417 NE2d 1290, 40 Ill Dec 276 (Ill 1980). Illinois case law suggests that where the value of the homestead exceeds the amount allowable under the homestead exemption, a judgment or mortgage will become a lien and is enforceable against the surplus. Cochran v Cutler, 39 Ill App 3d 602, 350 NE2d 59 (2nd D 1976); McDonald v Crandall, 43 Ill 231, 1867 WL 5016 (Ill 1867). Homestead estates cannot be casually waived or conveyed; the conveyance must be done explicitly, specifically and must be in writing and signed by the homesteaders. People v One Residence Located at 1403 East Parham St, 251 Ill App 3d 198, 621 NE2d 1026, 190 Ill Dec 573 (5th D 1993); Crum v O'Rear, 132 Ill 443, 24 NE2d 956 (Ill 1890).

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