## Facts

- A dissolution judgment required Kenneth H. Earp to pay Doris N. Earp $723,341 plus interest to equalize the community property division.
- While an appeal from the dissolution judgment was pending, Doris recorded a writ of execution against Kenneth’s mobilehome park; she agreed to stay enforcement if given adequate security.
- The parties executed a five-year “lease” of the mobilehome park to Doris under which she took possession, operated the park, and paid operating expenses, insurance premiums, and mortgage payments from tenant rents.
- The lease created a tenant reserve fund to hold surplus funds (rents minus payments made). A lease clause stated that, at each calendar year-end, surplus funds “shall become the property” of Doris.
- A lease amendment gave Kenneth an option to terminate the lease by paying the equalizing judgment in full by a specified date; if exercised, he was entitled to the tenant reserve fund balance as of the payment date.
- Kenneth exercised the option, paid the equalizing judgment in full, and demanded the full reserve fund balance (about $290,656).
- Doris refused, asserting that a portion of the reserve fund (about $186,500 in prior-year “surplus”) had already become her property under the year-end clause; she also sought compensation for managing the park.
- The trial court entered judgment for Kenneth for $290,656 plus interest, treating the arrangement as security for the debt and limiting Doris’s entitlement to profits.
- Doris appealed.

## Issues

1. Whether the parties’ lease-and-option arrangement, though labeled a lease, was intended as security for a debt and therefore operated as a mortgage.
2. If the arrangement functioned as a mortgage, whether Doris, as a mortgagee in possession, could retain rents/profits (including year-end “surplus” in the reserve fund) beyond the amount of the secured debt plus interest.
3. Whether Doris was entitled to additional compensation for her time and efforts managing the property while in possession.

## Decision

- The Court of Appeal affirmed the judgment for Kenneth.
- The court held the lease was intended as security for Kenneth’s equalizing obligation and therefore was, in substance, a mortgage.
- Because Doris functioned as a mortgagee in possession, her entitlement to profits was limited to satisfaction of the debt plus interest; she could not retain surplus funds beyond that amount.
- The court required Doris to remit the full tenant reserve fund balance existing when Kenneth paid the debt ($290,656) plus interest.
- The court rejected Doris’s claim for personal compensation for managing the property beyond reimbursement of proper expenses.

## Legal Principles

- A transaction transferring an interest in property to secure performance of an obligation is a mortgage regardless of the form or label used by the parties.
- Courts look to the parties’ objective purpose and the economic function of the arrangement; a “lease” used to secure a debt may be recharacterized as a mortgage.
- A mortgagee in possession may apply rents and profits to expenses and the secured obligation (including interest) but is not entitled to retain profits exceeding the debt plus interest.
- Contract terms allocating “surplus” profits to the creditor in possession cannot expand the creditor’s rights beyond limits imposed by mortgage law.
- A mortgagee in possession is not entitled to compensation for time and trouble in managing the property, apart from allowable expense reimbursement.

## Conclusion

The court treated the lease as a security device and therefore a mortgage, limiting the party in possession to recovery of the debt plus interest and requiring return of the tenant reserve fund balance when the debt was paid; it also denied any extra management compensation.


Earp v. Earp, 231 Cal. App. 3d 1008 (Ct. App. 1991)