## Facts

- Claude and Mary Downs sold land to Albert Ziegler, who executed a $75,000 installment promissory note secured by a real estate mortgage in favor of the Downses.
- Ziegler later suffered financial distress and defaulted on obligations, including a $30,000 personal note to a bank.
- To obtain funds and credit support, Ziegler entered a written agreement with three physicians under which:
  - Ziegler would convey his interest in the mortgaged parcel to the physicians; and
  - The physicians would enable financing to cure arrearages and would guarantee Ziegler’s $30,000 bank debt.
- The agreement was drafted to describe the transaction as a sale and stated it was “not a loan,” but it also granted Ziegler a right to reacquire the property within a year upon repayment of amounts advanced plus an additional sum.
- The physicians did not inspect the property before the transaction and did not take possession or behave as typical owners.
- The Downses sued to foreclose their mortgage and sought to hold Ziegler and the physicians personally liable for any deficiency after foreclosure.
- After a bench trial, the court granted foreclosure but ruled the physicians had no personal deficiency liability because their transaction with Ziegler functioned as a mortgage rather than an outright sale.
- The Downses appealed only the ruling that the physicians were not personally liable.

## Issues

1. Whether an agreement framed as an absolute conveyance with a repurchase option, made to obtain advances and credit support for a distressed owner, should be recharacterized as an equitable mortgage based on extrinsic evidence of intent.
2. If the transaction was a mortgage, whether the physicians could be held personally liable to the original mortgagees for any deficiency following foreclosure.

## Decision

- The appellate court affirmed.
- The court held the Ziegler–physicians transaction was a mortgage (a security arrangement), not a true sale.
- Because the physicians were mortgagees rather than purchasers who assumed the Downs obligation, they were not personally liable to the Downses for any deficiency.
- The court upheld the trial court’s use of extrinsic evidence to determine the parties’ intent despite contractual recitals labeling the deal a sale and “not a loan.”
- Any arguable evidentiary error in admitting statements bearing on intent was harmless because other evidence adequately supported the mortgage characterization.

## Legal Principles

- A conveyance absolute in form may be treated in equity as a mortgage if clear and convincing evidence shows it was intended as security for a debt.
- Courts may consider extrinsic evidence and surrounding circumstances to determine the parties’ true intent; labels and recitals in the instrument are not controlling.
- Indicators supporting mortgage characterization include the grantor’s financial distress, the transaction’s function as refinancing or debt protection, and the presence of a repurchase right consistent with a right of redemption.
- A party holding an interest as security (mortgagee) does not incur personal liability for a prior mortgage debt absent an assumption or other enforceable promise to the prior mortgagee.

## Conclusion

The court affirmed foreclosure of the Downses’ mortgage but held that the physicians’ arrangement with Ziegler, though drafted as a sale with a repurchase option, was an equitable mortgage proven by clear and convincing circumstances, and therefore did not impose personal deficiency liability on the physicians to the Downses.


Downs v. Ziegler, 13 Ariz. App. 387, 477 P.2d 261 (Ct. App. 1970)