## Facts

- Rexford Thomas sought a $1,000 bank loan and W. J. Schelling signed a $1,000 promissory note as an accommodation maker to enable the loan.
- On the same day, Thomas executed a written agreement stating that his timber patent and certain mill buildings would stand as security for Schelling until Thomas repaid the $1,000 and relieved Schelling of liability on the note.
- The mill buildings were then owned by Norine and Ernest McKee, but Thomas was in possession and later acquired title from the McKees.
- In January 1923, L. J. Conley loaned Thomas $2,000 and took a deed of trust on the buildings; the McKee-to-Thomas deed and Conley’s deed of trust were recorded in April 1923.
- In April 1923, Thomas executed a $600 mortgage on the buildings to Homer and Annie Douglas; the Douglas mortgage was later assigned to E. N. Tooby in October 1923.
- Thomas defaulted on all obligations; Conley initiated foreclosure, and Schelling sued to establish that the September 1922 agreement created an equitable mortgage and to determine lien priorities.
- The trial court ordered priorities: Tooby first, Schelling second, Conley third; Conley appealed.

## Issues

1. Whether Thomas’s September 22, 1922 written agreement to hold identified property as security for Schelling’s accommodation liability created an equitable mortgage on the timber patent and buildings.
2. If an equitable mortgage existed, whether it had priority over Conley’s later deed of trust and how it ranked relative to Tooby’s assigned mortgage.

## Decision

- The court held the September 22, 1922 agreement created an equitable mortgage securing Thomas’s obligation to indemnify Schelling on the $1,000 note.
- The court affirmed the judgment fixing lien priorities as: Tooby first, Schelling second, Conley third.
- Conley, as the later encumbrancer, did not displace Schelling’s earlier equitable security interest.

## Legal Principles

- An instrument intended to make specific property security for an obligation will be treated in equity as a mortgage, even if informal and not in statutory mortgage form.
- Equity determines the nature of a transaction by its substance and the parties’ intent, rather than labels or technical defects.
- An equitable mortgage may take priority over later encumbrances where the earlier security interest attached first and the later encumbrancer does not qualify to defeat prior equitable interests under recording and notice principles.
- Lien priority disputes may be resolved by enforcing earlier equitable security arrangements against subsequent security holders, subject to superior intervening liens.

## Conclusion

The court enforced the parties’ security intent by treating the 1922 writing as an equitable mortgage and affirmed the trial court’s priority order placing Tooby first, Schelling second, and Conley third.


Schelling v. Thomas, 96 Cal. App. 682, 274 P. 755 (Cal. Ct. App. 1929)