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Alabama Supreme Court: Statute of frauds does not apply when seller deeds real property directly to lender in purchase-money transaction.

Last month, the Alabama Supreme Court bypassed the statute of frauds and held that, even though one party had clear record title, the dispute over ownership should go to trial. While the opinion purported to apply “well-settled” Alabama law, it is a strong reminder that the statute of frauds does not apply to all real estate transactions and that record title holders may have to defend against an oral contract in certain situations.

In Newell v. Newell, No. 1160851, Floyd Newell held record title to two farms. His son Alan Newell claimed that he had purchased the farms in 1992 with a purchase-money loan from Floyd. In exchange for the loan, Alan had the sellers deed the farms directly to Floyd. Alan claimed that he had paid off the loans in 1999 but that Floyd had never deeded him back the farms. Importantly, Alan had no writing to support his claim of ownership.

In 2013, Floyd sued Alan for possession of the farms and Alan countersued asserting an equitable mortgage among other claims. The trial court concluded that Alan’s claim for ownership was barred by the statute of frauds and otherwise disposed of his remaining claims. On appeal, the Alabama Supreme Court reversed the summary judgment for Floyd. It cited “well-settled” Alabama case law (all from before the 1970s) holding that that when a person loans another money to purchase land and the seller thereby deeds the property directly to the lender, the transaction becomes a “resulting trust in the nature of an equitable mortgage.” The Court then explained that, in this situation, the trust arises by operation of law and not by contract. Thus, the statute of frauds does not apply. Further, because Floyd and Alan disputed the nature of the purchase, the trial court was wrong to enter summary judgment. The Court did point out, however, that Alan would have to prove his claim by clear and convincing evidence on remand.

Newell is an unusual case given that most modern real estate transactions are well documented. It should not have any serious impact on lenders and, in the event this situation should arise, title insurance may provide coverage for such claims. Still, given the ease with which the Alabama Supreme Court bypassed the statute of frauds, lenders should remember that Alabama law allows parties to assert ownership through a “resulting trust in the nature of an equitable mortgage.”