Marion D. Johnson; Vivian Y. Johnson v. Jason C. Washington

PUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
 MARION D. JOHNSON; VIVIAN Y.
JOHNSON,
Plaintiffs-Appellants,
v.
JASON C. WASHINGTON; D AND D
HOME LOANS CORPORATION;
WARREN MIKE ROBINSON, No. 08-1421 individually,
Defendants-Appellees,
and
BNC MORTGAGE, INCORPORATED,
f/k/a Finance America; SAMUEL I.
WHITE, P.C.,
Defendants. 
Appeal from the United States District Court
for the Eastern District of Virginia, at Norfolk.
Jerome B. Friedman, District Judge.
(2:07-cv-00204-JBF-FBS)
Argued: January 27, 2009
Decided: February 24, 2009
Before WILLIAMS, Chief Judge, WILKINSON,
Circuit Judge, and Arthur L. ALARCÓN,
Senior Circuit Judge of the United States Court of Appeals
for the Ninth Circuit, sitting by designation.

-- 1 of 12 --

Affirmed by published opinion. Judge Wilkinson wrote the
opinion, in which Chief Judge Williams and Senior Judge
Alarcon joined.
COUNSEL
ARGUED: Daniel Paul Mosteller, CENTER FOR RESPON-
SIBLE LENDING, Washington, D.C., for Appellants. Jason
E. Manning, TROUTMAN & SANDERS, L.L.P., Virginia
Beach, Virginia; Paul R. Schmidt, HUFF, POOLE &
MAHONEY, P.C., Virginia Beach, Virginia, for Appellees.
ON BRIEF: Melissa Briggs, CENTER FOR RESPONSIBLE
LENDING, Washington, D.C.; Tanya Bullock, BULLOCK &
COOPER, P.C., Virginia Beach, Virginia, for Appellants. Ali-
son R. Zizzo, HUFF, POOLE & MAHONEY, P.C., Virginia
Beach, Virginia, for Appellees D & D Home Loans Corpora-
tion and Warren Mike Robinson; John Lynch, TROUTMAN
& SANDERS, L.L.P., Virginia Beach, Virginia, for Appellee
Jason C. Washington.
OPINION
WILKINSON, Circuit Judge:
Marion and Vivian Johnson appeal the district court’s grant
of summary judgment on their claim that defendants violated
various consumer protection laws when purchasing the John-
sons’ home. The Johnsons argue that the purported sale of
their home actually created an equitable mortgage under Vir-
ginia common law, thereby obligating defendants to comply
with federal and state lending laws, namely the Truth in Lend-
ing Act, 15 U.S.C. § 1601 et seq., and the Virginia Mortgage
Lender and Broker Act, Va. Code § 6.1-422. Because we find
that the transaction was an absolute sale that did not give rise
to any debt between the parties, we conclude that it did not
2 JOHNSON v. WASHINGTON

-- 2 of 12 --

create an equitable mortgage. We likewise find no merit in the
Johnsons’ claim of fraud. We therefore affirm the judgment
of the district court.
I.
A.
We view the facts in the light most favorable to plaintiffs,
the non-prevailing party. In December 1995, Marion and Viv-
ian Johnson paid approximately $130,000 to purchase a home
in Norfolk, Virginia. In 2002 or 2003, they refinanced their
mortgage with NovaStar Mortgage, Inc. ("NovaStar"). In
2005, they fell two months behind in their mortgage payments
and sought to refinance again. By this time, plaintiffs claim
the home had appreciated to $260,000, with the Johnsons
holding about $100,600 in equity in the home and the remain-
ing $159,400 representing the outstanding balance on the
NovaStar mortgage. In hopes of refinancing, Mr. and Mrs.
Johnson contacted Warren Robinson, a mortgage broker and
the president of D&D Home Loans Corporation, who told
them it would be difficult to refinance because of their poor
credit history and previous bankruptcy filings.
In May 2005, Robinson referred the Johnsons to Jason
Washington, a private investor. When Washington met with
the Johnsons, he presented them with an "Offer to Purchase
Real Estate" that stated that Washington would purchase the
home for $212,800. The couple signed this document without
reading it. They then met with Washington on June 30, 2005,
for a real estate closing, at which they signed a HUD-1 Settle-
ment Statement and a deed conveying title to Washington.
To finance his purchase of the house, Washington took out
two mortgages from Finance American, which were secured
by deeds of trust on the property. Of the $212,800 total sales
price, Washington used $166,600.05 to pay off the Johnsons’
NovaStar mortgage. He gave the Johnsons a check for
3 JOHNSON v. WASHINGTON

-- 3 of 12 --

$44,410.56, which was listed as the "Amount to Seller" in the
HUD-1 Settlement Statement.
One week later, Washington and Mr. and Mrs. Johnson
signed a Contract for Deed of Real Property ("Contract") that
gave the Johnsons an option to repurchase the property within
thirteen months for $249,079. This amount included an initial
down payment of $36,279 and a final payment of $212,800.
The Contract also provided that the Johnsons would remain at
the home in return for making monthly payments of
$1,896.64 for twelve months, with the first payment due on
August 1, 2005. The Contract provided that the Johnsons
would lose the option to repurchase after thirteen months, and
that the Contract would become a lease agreement if their
monthly payments were over five days late. Washington used
most of the Johnsons’ monthly payment amount to satisfy his
payments on the Finance American mortgages. Mr. and Mrs.
Johnson continued to live at the property and make monthly
payments to Washington, but they stopped making payments
in February or March 2006.
B.
In March 2007, the Johnsons filed a twelve-count com-
plaint against Robinson, Washington, and D&D Home Loans
Corporation, alleging inter alia fraud, breach of contract, vio-
lations of the Truth in Lending Act, 15 U.S.C. § 1601 et seq.,
and predatory lending practices under the Virginia Mortgage
Lender and Broker Act, Va. Code § 6.1-422. They claimed
that the transaction with Washington, despite being clothed in
the form of an absolute sale, actually gave rise to an equitable
mortgage that required Washington to comply with federal
and state consumer protection statutes. They also alleged that
Robinson and Washington had misled them about the nature
of the transaction by making statements such as "Washington
does not want your house" and by telling them they could
refinance again in twelve to thirteen months.
4 JOHNSON v. WASHINGTON

-- 4 of 12 --

Following discovery, the district court granted summary
judgment to defendants. Johnson v. D&D Home Loans Corp.,
No. 2:07cv204, 2008 WL 850870 (E.D. Va. Jan. 23, 2008).
The court held that the transaction did not give rise to an equi-
table mortgage because the Johnsons were never indebted to
Washington and "[t]here was no penalty if [they] chose not to
exercise their repurchase option." Id. at *8. The court also
rejected the plaintiffs’ fraud claims, finding that Washington
and Robinson’s statements were either true or were statements
of "opinions and expressions of desire," not statements of
fact. Id. at *5. The district court further held that the John-
sons’ fraud claim was precluded because they had "fail[ed] to
read any of the documents they were signing." Id. This appeal
followed.
II.
The Johnsons’ central claim is that the transaction with
Washington gave rise to an equitable mortgage under Virginia
common law, thereby obligating Washington to comply with
federal and state consumer protection statutes. We disagree.
Because there was no preexisting or contemporaneous debt
between the parties, there is no basis for finding an equitable
mortgage. Even assuming some debt did exist, the relevant
circumstances in this case do not justify invoking equity to
contradict the plain terms of the transaction.
The Johnsons raise claims under both the Truth in Lending
Act ("TILA") and the Virginia Mortgage Lender and Broker
Act ("MLBA"). The TILA is a federal statute that requires
clear disclosure of terms in consumer credit transactions. 15
U.S.C. § 1601 et seq. Its protections apply only to loans, not
to sales. Similarly, the MLBA governs the practices of
licensed lenders and brokers, but does not apply to real estate
sales. Va. Code § 6.1-422. Therefore, to show that defendants
were required to comply with these laws, the Johnsons must
show that their transaction in fact created a lending relation-
ship.
5 JOHNSON v. WASHINGTON

-- 5 of 12 --

Under Virginia law, a deed that is absolute on its face "is
presumed absolute unless the party challenging the presump-
tion can prove by clear, unequivocal and convincing evi-
dence" that it is not. In re Seven Springs, Inc., 159 B.R. 752,
755 (E.D. Va. 1993) (citing Pretlow v. Hopkins, 30 S.E.2d
557 (Va. 1944)). The Johnsons therefore bear the burden of
showing that the transaction, which purported to transfer own-
ership of the house from them to Washington, actually created
an equitable mortgage.
In assessing whether an equitable mortgage exists, courts
ask two questions. First, they ask whether the parties enjoyed
a borrower-lender relationship, signified by the presence of a
debt secured by title to the property. Seven Springs, 159 B.R.
at 755-56. "The existence of a debt is the test." Holladay v.
Willis, 43 S.E. 616, 618 (Va. 1903). This debt must have
existed before the transaction or be created contemporane-
ously with it. Snavely v. Pickle, 70 Va. 27, 35 (1877). If a
court finds that a debt existed, it then asks whether circum-
stances warrant finding an equitable mortgage. See Seven
Springs, 159 B.R. at 756 (listing relevant circumstances).
The requirement of a debt between the parties is more than
a formality. As the Supreme Court of Appeals of Virginia
noted in Holladay, "[a] mortgage without a debt to support it
is a legal solecism," and "‘neither the intention of the parties
nor their express contract can change the essential nature of
things.’" 43 S.E. at 618 (quoting Turner v. Kerr, 44 Mo. 429
(1869)). This rule is especially important in the context of
equitable mortgages. Because such mortgages are an excep-
tion to the general rule that parole evidence is inadmissible to
contradict the terms of a contract, the proof necessary to sus-
tain them "must be so convincing as to leave no doubt on the
mind that a mortgage, and not an absolute conveyance, was
intended." Id. at 617. Mere statements of intent cannot meet
this burden; rather, the presence of debt between the parties
is necessary to show the intent to create a mortgage and a
6 JOHNSON v. WASHINGTON

-- 6 of 12 --

promise to repay. E.g., Tuggle v. Berkeley, 43 S.E. 199, 201
(Va. 1903).
In addition, absent some debt between the parties, the
grantee (Washington) has no personal recourse against the
grantor (the Johnsons) if the property later sells at a loss or the
grantee cannot otherwise recover on his investment. As the
court noted in Holladay, this lack of recourse clearly shows
that the parties lacked a debtor-creditor relationship. 43 S.E.
at 618. And because purchase and lease-back arrangements
such as the Johnsons’ are so common, allowing courts of
equity to find equitable mortgages based on the testimony of
one party alone—a party who later regrets the transaction—
could potentially convert any number of real estate sales into
equitable mortgages.
The Johnsons acknowledge that the court must find some
debt between the parties. But they argue that the Contract’s
option to repurchase constituted such a debt, and that the con-
sequence of not making the repurchase payments was the loss
of their home. But Virginia law is clear: an option to repur-
chase is not an obligation to repurchase, and therefore does
not constitute a debt between the parties. E.g., Holladay, 43
S.E. 616; Clemons v. Home Savers, 530 F. Supp. 2d 803 (E.D.
Va. 2008), aff’d, 273 F. App’x 296 (4th Cir. 2008) (per
curiam). In Holladay, the defendant purchased the plaintiff’s
property. As part of the transaction, he also paid off a debt the
plaintiff owed on the property. The parties later executed an
option agreement that let the plaintiff repurchase the property
within two years. Holladay, 43 S.E. at 616-17. The Supreme
Court of Appeals of Virginia ruled that there was no debt
between the parties because the defendant’s "payment of [the
plaintiff’s] indebtedness did not constitute a new debt." Id. at
618. Therefore, the transaction constituted a sale with an
option to repurchase, not an equitable mortgage.
A federal district court recently affirmed this principle in
Clemons, 530 F. Supp. 2d 803. In Clemons, the defendant
7 JOHNSON v. WASHINGTON

-- 7 of 12 --

company purchased the plaintiff’s home and assumed her
mortgage, but gave her the option to repurchase the home if
she made monthly lease payments and later paid 90 percent
of the home’s appraised value. Id. at 806-07. Although the
plaintiff remained in the home for several months, she could
not obtain the necessary financing to pay the option price by
the required date. Id. at 807. When the plaintiff sued under the
TILA, the district court found that the transaction had not cre-
ated an equitable mortgage because the plaintiff "was not
obligated to repurchase the property"; she could have vacated
the property at the end of her lease; and the defendant had no
recourse against her if it sold the property and could not
recover on its investment. Id. at 809.
In response, the Johnsons cite several cases for the proposi-
tion that an option to repurchase does constitute a debt
between the parties. Snavely v. Pickle, 70 Va. 27 (1877); Tug-
gle v. Berkeley, 43 S.E. 199 (Va. 1903); Magee v. Key, 191
S.E. 520 (Va. 1937); Johnson v. Johnson, 33 S.E.2d 784 (Va.
1945). But these cases all involved a promise to repay a spe-
cific debt advanced by the grantee and secured by a deed to
the property. In Tuggle, for example, a woman conveyed a lot
and residence to her son-in-law in exchange for his payment
of $600 of delinquent taxes on the property. 43 S.E. at 199-
200. The deed stated that the son-in-law would reconvey the
property to her if she repaid the $600 plus interest. Id. The
Supreme Court of Appeals of Virginia found that the transac-
tion involved an implied promise to repay the debt, and there-
fore created an equitable mortgage.
This case by contrast is like the transactions at issue in Hol-
laday and Clemons, where the sale of the property created no
debt between the parties. The only debt created from this
transaction was Washington’s own mortgages taken to pur-
chase the Johnsons’ home. Washington, not the Johnsons,
incurred an obligation to make payments on the new loans. In
fact, the Johnsons were not obligated beyond their monthly
payments—they enjoyed an option to repurchase, but they
8 JOHNSON v. WASHINGTON

-- 8 of 12 --

could have stopped making payments and vacated the home
at the end of twelve months, and Washington would have
lacked any legal recourse against them. See Clemons, 530 F.
Supp. 2d at 809. In the event that housing prices fell and the
proceeds from any sale did not cover the amount still owed,
Washington would be obligated to pay—the Johnsons would
not. See Holladay, 43 S.E. at 618. The relationship of Wash-
ington to the Johnsons was clearly one of buyer to seller, not
creditor to debtor. There is therefore no basis for finding an
equitable mortgage. See Seven Springs, 159 B.R. at 755-56.
III.
Even if the Johnsons could show they owed some debt to
Washington, we would still need to find equitable circum-
stances to conclude that the transaction created an equitable
mortgage. Hunter v. Bane, 149 S.E. 467, 468-69 (Va. 1929).
In Seven Springs, 159 B.R. at 756, the court narrowed the list
of relevant circumstances to four: "(1) intentions of the par-
ties; (2) adequacy of consideration; (3) retention of possession
by the grantor; and (4) satisfaction or survival of the debt."
We can determine the parties’ intentions from their actions
and from the plain terms of the documents they signed. Cle-
mons, 530 F. Supp. 2d at 810. Mr. and Mrs. Johnson here
engaged in a formal, arms-length transaction and signed
numerous documents stating the terms of the sale. Cf. John-
son, 33 S.E.2d at 789-90. When the Johnsons first sought to
refinance, they spoke with Robinson, who warned them that
they would not be able to refinance given their poor credit
history. Next, the Johnsons met with Washington, a private
investor, who presented them with an "Offer to Purchase Real
Estate." They signed this document and later attended a real
estate closing with Washington. In total, Mr. and Mrs. John-
son signed no less than four documents indicating they were
selling their home. On two of the documents (the Offer and
the HUD-1 Settlement Statement), they signed next to the
word "Seller."
9 JOHNSON v. WASHINGTON

-- 9 of 12 --

The Johnsons were not unsophisticated parties: both had
college degrees and previously had completed at least two
real estate closings and one refinance. See Clemons, 530 F.
Supp. 2d at 810 ("Having refinanced three times, [the plain-
tiff] certainly understood that her agreement with [the defen-
dant] was unlike her previous mortgage loan."). In fact, they
conceded that they had never read the documents or asked any
questions about the transaction, which would have yielded
information about the terms of the sale. Given that the John-
sons were on notice that they could not refinance again, and
given the clear terms of the documents they signed, it is diffi-
cult to credit their argument that they merely intended to take
out a loan from Washington.
Next, the Johnsons argue that finding an equitable mort-
gage is proper because Washington’s purchase price of
$212,800 was less than the home’s claimed value of
$260,000. But this difference is much less than the disparate
values seen in cases finding an equitable mortgage. See, e.g.,
Magee, 191 S.E. at 522 (where the grantor received 58 per-
cent of the property’s market value). Nor do the Johnsons
show that they could have received more for the house given
market conditions and their need to sell quickly.
Indeed, the Johnsons benefited from the transaction in sev-
eral respects: they owed nothing to NovaStar or to any other
mortgage company, they could remain in the home, and they
could walk away at the end of twelve months if they were no
longer able or no longer wished to live there. Like many par-
ties raising equitable mortgage claims, the Johnsons "took
advantage of the only available opportunity to remain in
[their] home." Clemons, 530 F. Supp. 2d at 810. Given their
circumstances, they likely received the best deal they could
get. And to the extent they did face hardship—for example,
in their inability to pay the final portion of the repurchase
price—it arose not from the terms offered by Washington, but
from the Johnsons’ inability to attract financing. The Con-
tract’s terms did not present an impossible barrier to repur-
10 JOHNSON v. WASHINGTON

-- 10 of 12 --

chasing. But the Johnsons’ odds of obtaining the necessary
financing would clearly depend on their creditworthiness. The
Johnsons faced a difficult situation not because Washington
offered them unattainable terms, but because, due to their
poor credit history and previous bankruptcy filings, lenders
would be unlikely to regard them as an acceptable credit risk.
Finally, although continued possession of the property is
one factor indicating the parties’ intentions, Seven Springs,
159 B.R. at 757 (citing Tuggle, 43 S.E. at 202), it is far from
dispositive. Hunter, 149 S.E. at 469. Real estate transactions
often involve purchase and lease-back arrangements where
the grantor continues living in the home, but not all such
transactions constitute equitable mortgages. E.g., Clemons,
530 F. Supp. 2d at 810. Instead, continued possession can but-
tress an equitable mortgage claim where other factors, such as
the presence of a debt and significantly inadequate consider-
ation, already suggest that the grantor implied a promise to
repay. E.g., Tuggle, 43 S.E. at 200-01. Here, the absence of
those other factors, along with the form of the transaction—an
absolute sale followed one week later by a contract for an
option to repurchase—suggest that the Johnsons’ possession
of the home was part of a typical purchase and lease-back
arrangement rather than a sign of continued ownership.
In sum, the relevant circumstances do not suggest that
equity should intervene to contradict the plain terms of the
documents that the Johnsons signed.
IV.
Finally, we reject the Johnsons’ claim of fraud because the
statements made by Washington and Robinson (e.g., "We
want to help you") were either accurate or were forward-
looking statements of opinion. See, e.g., Yuzefovsky v. St.
John’s Wood Apartments, 540 S.E.2d 134, 142 (Va. 2001).
Even assuming that Robinson did mislead the Johnsons,
which we do not suggest, the documents that they signed
11 JOHNSON v. WASHINGTON

-- 11 of 12 --

plainly stated the terms of the transaction and more than cor-
rected any misleading oral statements. See, e.g., Rollison v.
Washington Nat’l Ins. Co., 176 F.2d 364, 367 (4th Cir. 1949).
Plaintiffs cannot be heard to complain when they failed to
read the relevant documents. We therefore affirm the judg-
ment of the district court.*
AFFIRMED
*The Johnsons also formally appeal the district court’s award of dam-
ages to Washington on his breach of contract counterclaim. This issue,
however, was not briefed or argued on appeal. In all events, the Contract’s
plain terms required the Johnsons to make monthly lease payments to
Washington through July 2006, an obligation they failed to fulfill.
12 JOHNSON v. WASHINGTON

-- 12 of 12 --