## Facts

- Derrick and Janelle Harding loaned Chester and Fannie Smith $94,000 so the Smiths could buy a parcel of land next to their home.
- The debt was documented by a promissory note that covered both the Smiths’ home and the adjoining parcel.
- The Smiths later defaulted on the monthly payments.
- After the default, the parties reached a new arrangement to address the delinquency.
- The Smiths deeded the subject property to the Hardings (a deed in lieu of foreclosure).
- The Hardings orally leased the property back to the Smiths for $1 per year.
- The parties understood that the Hardings would deed the property back to the Smiths if the Smiths fully repaid the debt from the original mortgage transaction.
- The Smiths sued the Hardings, seeking (among other remedies) a declaration that the deed should be treated as an equitable mortgage; alternatively, the Smiths sought rescission or reformation of the deed.
- The Smiths also asserted claims for breach of fiduciary duty and fraudulent inducement.

## Issues

1. Whether the deed in lieu of foreclosure, together with the $1-per-year leaseback and the understanding that title would be returned upon full repayment, should be treated as an equitable mortgage rather than an outright conveyance.
2. Whether, after finding an equitable mortgage, the trial court had authority in equity to set or recompute repayment terms, including an annual payment amount.
3. Whether the Smiths were entitled to rescission, reformation, breach-of-fiduciary-duty, or fraudulent-inducement relief in addition to (or instead of) equitable-mortgage relief.

## Decision

- The district court denied the Smiths’ claims for rescission and reformation of the deed.
- The district court also denied the Smiths’ claims for breach of fiduciary duty and fraudulent inducement.
- The district court ruled that the deed in lieu of foreclosure functioned as an equitable mortgage securing the Smiths’ continuing debt to the Hardings.
- After treating the transaction as a mortgage, the district court computed a new payment obligation of $12,000 per year.
- The Hardings appealed, arguing the trial court improperly repudiated an arm’s-length contract by recharacterizing the deed and recalculating payment terms.
- The Kansas Court of Appeals affirmed in an unpublished decision, leaving the equitable-mortgage determination and the trial court’s equitable repayment structure in place.

## Legal Principles

- Equity may treat a transaction labeled as an absolute conveyance as a mortgage when the circumstances show it was intended to secure repayment of a debt.
- Facts supporting an equitable-mortgage finding include continued possession by the grantor, nominal rent under a leaseback, continuing indebtedness, and an agreement or understanding that the grantee will reconvey title once the debt is paid.
- When a deed is treated as security, the borrower retains a redemption right, and a court sitting in equity may craft relief consistent with a mortgagor–mortgagee relationship.
- A lender–borrower relationship does not, by itself, create a fiduciary duty; a fiduciary-duty claim requires a special relationship beyond an ordinary loan arrangement.
- Fraud-based relief requires proof of the required fraud elements; absent that proof, such claims fail even if the transaction is recharacterized as an equitable mortgage.

## Conclusion

In Smith v. Harding, the Kansas Court of Appeals affirmed a district court’s determination that a deed in lieu of foreclosure—paired with a token $1-per-year leaseback and an understanding that the property would be deeded back upon full repayment—was intended as security for an existing debt and therefore operated as an equitable mortgage, allowing the trial court to impose equitable repayment terms while rejecting the Smiths’ separate rescission, reformation, fiduciary-duty, and fraud claims.


Smith v. Harding, 2010 WL 2044920 (2010)