## Facts

- Guam Hakubotan, Inc. agreed to buy two parcels of Guam real property for $1,895,000.
- To fund the down payment, it borrowed 170 million yen (about $654,000) from Yasuda Shoji KK at 1.5% monthly interest, with principal due in one year, secured by mortgages on five parcels (including junior mortgages on the two acquired parcels).
- Hakubotan also gave the seller a $1,495,000 note secured by senior mortgages on the two purchased parcels.
- Before the Yasuda principal came due, Hakubotan requested a six-month extension and continued paying interest.
- As part of the extension, Hakubotan executed a warranty deed to Yasuda’s designee, Furusawa Investment Corp., to be held and recorded only if Hakubotan defaulted during the extension period.
- Hakubotan failed to pay principal by the end of the extension; Furusawa recorded the deed and obtained record title.
- Hakubotan sued, asserting the deed was a disguised mortgage and void under Guam Civil Code § 2889 as a restraint on the right of redemption.

## Issues

1. Whether the warranty deed, recordable upon default during a loan-extension period, should be treated as a continuation of the original mortgage rather than an outright conveyance.
2. Whether the deed/extension arrangement violated Guam Civil Code § 2889 as a contract restraining redemption from a lien.

## Decision

- The Ninth Circuit reversed the appellate affirmance of judgment for Hakubotan.
- The court held the deed and extension agreement, viewed as a whole, were not merely a continuation of the mortgage and could not be invalidated as a disguised mortgage on this record.
- The court held Guam Civil Code § 2889 did not invalidate the deed-in-escrow mechanism used in the extension agreement.

## Legal Principles

- A deed executed as part of a loan-extension bargain and recordable upon default is not automatically recharacterized as a mortgage; the transaction is assessed as a whole to determine its legal effect.
- Guam Civil Code § 2889 targets contracts that restrain redemption from a lien; it does not categorically prohibit an independently bargained-for conveyance tied to a loan extension when the arrangement is not treated as an impermissible waiver within the mortgage-lien framework.
- Courts may enforce the parties’ commercial allocation of risk in a loan extension where additional consideration (time) is exchanged for additional protection (a deed triggered by default).

## Conclusion

The Ninth Circuit upheld the validity of a deed-in-escrow given for a six-month loan extension, rejecting the claim that it was a disguised mortgage or an unlawful restraint on redemption under Guam Civil Code § 2889, and reversed the judgment that had voided the deed.


Guam Hakubotan, Inc. v. Furusawa Inv. Corp., 947 F.2d 398 (9th Cir. 1991)