Jones v. . Williams , 155 N.C. 179 ( 1911 )

After stating the case: We think it may fairly be inferred from the record that A. F. Williams bought the notes and the mortgages from Fred Martin during the pendency of this action and after the complaint had been filed therein. If so, he acquired his interest in them subject to any judgment rendered herein, for this suit would be a complete lis pendens. Lord Bacon stated the common law rule (184) to be that "no decree bindeth any that cometh in bona fide by conveyance of the defendant before the bill exhibiteth, and is made no party, neither by bill or order; but when he comes in pendentelite, and while the suit is in full prosecution, and without any order of allowance or privity by the court, then regularly the decree bindeth. This rule had its origin in the civil law, and was pungently stated in the legal maxim, pendente lite, nihil innovetur." 4 Bacon's Works, 515. SirWilliam Grant said in Bishop of Winchester v. Paine, 11 Vesey, 194201, that "he who purchases during the pendency of the suit, is bound by the decree that may be made against the person from whom he derives the title; the litigating parties are exempted from the necessity of taking any notice of a title so acquired; as to them it is as if no such title existed, otherwise suits would be interminable, or, which would be the same in effect, it would be the pleasure of one party at what period the suit should be determined. The rule may sometimes operate with hardship, but general convenience requires it." Wiltsie Mortgage Foreclosures, sec. 41 and notes. It may therefore be taken as well settled that a judgment in an action in rem or one to foreclose a mortgage binds not only the parties actually litigating and their privies, but also all others claiming or deriving title under them by a transfer pendente lite. The filing a formal lis pendens is not required for the application of this recognized principle when the suit is brought in the county where the land is situated. Dancy v. Duncan, 96 N.C. 111; Collingwood v.Brown, 106 N.C. 362; Overton v. Hinton, 123 N.C. 2; Harris v.Davenport, 132 N.C. 697; Morgan v. Bostic, ibid., 743; Pell's Revisal, sec. 460 and notes; Wiltsie, sec. 40. While the facts relating to thelis pendens are not very clearly set out in the record, we think it sufficiently appears that A. F. Williams was a purchaser pendente lite, and must be held bound by the judgment in this action, but there is another question raised in the case which we think was erroneously decided. Our decision is based upon both grounds.

The defendant Williams failed to make the plaintiff, who was a junior encumbrancer, a party to the foreclosure suit brought by him against Rufus Branch, the mortgagor. The plaintiff is therefore (185) not bound by the proceedings and judgment in that case and his lien upon the land was not affected thereby. In treating of this question, Wiltsie, in section 60, says that persons who have acquired an interest in the equity of redemption by encumbrance, such as a mortgage, subsequent to the execution of the mortgage under foreclosure, are necessarily parties to the foreclosure suit in order to extinguish their claims. "The theory of the law is, that such an encumbrance is a pledge of the equity for the debt, and gives the lienor an equitable interest in the mortgaged premises. As the owner of the equity may, by an absolute conveyance, transfer his entire interest, and thereby make his transferee a necessary party, as we have seen, so he can on the same principle pledge, by a mortgage, judgment or otherwise, a part or the whole of his interest in the premises, and thereby render the encumbrancer a necessary party in order to wipe out his interest. Though a lienor does not acquire the fee title to the equity, he acquires an interest in the premises which the statutes of the various States have long established, and which the courts have long recognized and sustained; and which parties, dealing with the premises, cannot ignore, except at their own peril." He thus sums up the law upon the subject: "All authorities in all countries where mortgages are foreclosed by equitable actions, are agreed that subsequent and junior mortgagees are necessary parties to the foreclosure of a prior mortgage in order to extinguish and cut off their liens. The action can be sustained without them, but a defective title would be offered at the sale which no court would compel a bidder to accept. The rule has long been settled that in a bill to foreclose a mortgage, the rights of encumbrancers not made parties to the suit, are not barred or affected by the decree. If a junior mortgagee is omitted as a party, his remedy is to redeem from the sale under foreclosure." Wiltsie, sec. 61. He cites numerous and well considered cases to sustain his views. In Gagev. Brewster, 31 N.Y. 218, a case much like ours, the Court said: "The plaintiff was not affected by the foreclosure suit upon defendant's mortgage, to which he was not made a party. He was, therefore, entitled to redeem, precisely as though no such action had been brought, namely, by paying the mortgage debt and interest . . . . When seeking to extinguish the equity of redemption and to bring the (186) premises to a sale, it was his duty to ascertain to whom that equity of redemption belonged. It was the subject of transfer by sale or mortgage, and it had been actually mortgaged to the plaintiff, and his mortgages were on record." So it was said in Gould v. Wheeler,28 N.J. Eq. 541: "The complainant would be entitled to a decree of foreclosure and sale, but for the fact that it appears by her bill that there is a subsequent encumbrancer, a mortgagee, who is not made a party to the suit. That mortgagee is a necessary party. A mortgagee who comes into court for foreclosure and sale of the mortgaged premises, is not at liberty to omit, as parties to the proceedings, those who hold encumbrances subsequent to his own. The general rule is, that the holders of all encumbrances existing at the time of commencing the suit must be made parties. Story's Eq. Pl., sec. 193; Ensworth v. Lambert, 4 Johns., ch. 605; Adams v. Paynter, 1 Col. C. C., 530; I Fisher on Mortgages, 554, 555, 556. It is true that if they be not made parties, the proceedings are of no avail against them, but that is no reason for making a suit for foreclosure and sale of mortgaged premises an exception to the general rule of equity, which requires that all persons in interest be parties to the suit. It is manifestly unjust to all persons interested in the proceeds of the sale of the mortgaged premises, that the sale be made subject to an outstanding right to redeem, for that invariably and inevitably prejudices the sale. The bill must be amended by making the holder of the mortgage given by Stewart (the third mortgage) a party, and he must be brought into court, and the cause be proceeded in regularly as against him. In the meantime the suit will be stayed." Cases directly in point are Murphy v. Farwell, 9 Wis. 102; Carpenter v.Brenham, 40 Cal. 221; Johnson v. Hosford, 110 Ind. 572; County ofFloyd v. Cheney, 57 Iowa 160; Stewart v. Johnson, 30 Ohio St. 24;Johnson v. Hambleton, 52 Md. 378; Watson v. Investment Co., 12Oregon, 474; Rogers v. Holyoke, 14 Minn. 220; Smith v. Chapman,4 Conn. 344; Hodgen v. Gutlery, 58 Ill. 431. The case last cited is strikingly like the case at bar in its facts. In Hall v. Hall, 11 Tex. 547 [11 Tex. 547] (approved afterwards in Mills v. Traylor, (187) 30 Tex. 7[30 Tex. 7]), it is said: "All persons having an interest in the equity of redemption should be made parties to a bill of foreclosure. If such encumbrancers, whether prior or subsequent, are not made parties, the decree of foreclosure does not bind them, as also a decree of sale would not. The prior encumbrancers are not bound, because their rights are paramount to those of the foreclosing party. The subsequent encumbrancers are not bound, because their interest would otherwise be concluded, without an opportunity to assert or protect them. In the case now under consideration, the lands were sold to the appellees subsequent to the mortgage to appellants, and it may be held, that the appellees took the property subject to that encumbrance. They should, however, not have been precluded or affected by a proceeding had in their absence and without notice." In Crane v. Cotrell, 48 Neb. 646, the Court applied the principle and said: "The plaintiffs were not made parties to the foreclosure suit, and were not bound by those proceedings. The mere fact that they had notice of its pendency did not make them parties or bind them by the decree. This is elementary. The foreclosure and sale were therefore utterly ineffectual to bar plaintiff's mortgage. A junior mortgagee who has not been made a party to the proceeding foreclosing the senior mortgage has thereafter a right to redeem from such senior mortgage (the purchaser at the judicial sale). (Renard v. Brown,7 Neb. 449.) Therefore, when this foreclosure was properly pleaded in the present case, the facts demanded that the plaintiffs, instead of merely having their mortgage reestablished, should be permitted to redeem the Stoddar mortgage. Why the court denied this relief and denied plaintiffs any relief, the record does not inform us. . . . If he (Stoddar) did not know of plaintiff's rights when he took the mortgage, he learned them within a very few days thereafter. At the time of the foreclosure sale this very suit was pending in which he is a party. He had full notice of all the facts. A mistake of law would not protect him." The Court, in Howard v. R. R., 101 U.S. 837, held that while the senior mortgagee can proceed by suit to foreclose against the mortgagor alone, and in that sense a subsequent lienor or encumbrancer is not a necessary party, the decree is not binding upon the latter so as to supersede or displace his lien, but it left him still the (188) right, as a second encumbrancer, to redeem, which he may do if his right is not lost by laches or lapse of time. "Subsequent encumbrancers," says Justice Clifford, who delivered the opinion, "when not made parties to a bill for foreclosure or sale, are not bound by the decree; nor is that rule violated in the least degree when it is held that the title of the defendants is paramount, as that consequence flows from the fact that the lien of the judgment under which the defendants claim is prior to that under which the plaintiff claims his title. Whatever rights the plaintiff had prior to the sale in equity which gives the defendants the paramount title, he still has, wholly unimpeached by that sale or by any other cause, unless they are barred by lapse of time or laches. Process against the plaintiff under that decree could not affect his rights, as he was not a party to the proceeding, consequently the lien of his judgment still remained in full force. Even if the plaintiff had been made a party to that proceeding, the only effect would have been to cut off his equity of redemption, and as he was not made a party, his equity of redemption is not extinguished." The counsel of defendant Williams, Mr. John Robinson, in his excellent brief, and also at the bar in his well prepared and forceful argument, relied on the following cases: Kornegay v. Steamboat Co., 107 N.C. 115; Lumber Co. v.Hotel Co., 109 N.C. 658; Williams v. Kerr, 113 N.C. 306, and Gammonv. Johnson, 126 N.C. 64; and contended that it had been decided by them that a second encumbrancer is not a necessary party to a foreclosure suit by the first lien-holder or mortgagee. This may be conceded, and yet the deduction drawn therefrom, that he will be barred of his right to redeem, is not warranted. We have said he is not a necessary party, in the sense that the decree will be void without him as to those who are parties, but he is clearly entitled to redeem and we think that the Court, in Williams v. Kerr and Gammon v. Johnson, approves the principle as we have stated it. In the case last mentioned he is said to be a necessary, or at least a proper, party in order to have a complete adjustment of the rights of all interested persons, and further, that the court should ex mero motu require him to be brought in by (189) process so as to conclude him. In Williams v. Kerr the assignee of the mortgagor was held, for special reasons, to be affected by the foreclosure suit, as a lis pendens, and to be bound by its orders and decrees. In the Kornegay and Lumber Company cases, the Court had under consideration the priority of a lien, under the statute, of a mechanic or material-man. In none of those cases, as we read and understand them, was the precise question raised which is now before us for decision, and we think that all those cases may be reconciled with what we have hereinbefore said as to the effect of a decree upon a junior encumbrancer not a party to the foreclosure sale. Pitt v. Moore,99 N.C. 85. There is nothing decided in Hinson v. Adrian, 86 N.C. 61, that militates against the views we have so far expressed, but the decision rather coincides with them. The Court says: "While there is some diversity of opinion as to the practice in requiring the presence of prior and posterior mortgagees in a foreclosure suit, the preponderance of authority favors the propriety, if not the necessity, of their being parties, in order to a full and final adjustment of all the equities involved." It is true that, when referring to certain authorities upon the subject, it is casually said that, if not made a party, the second encumbrancer would be concluded without an opportunity to assert his rights or protect them, but this was an inadvertence, we think, and not justified by the cases, and directly opposed to the overwhelming weight of authority, and it was not at all necessary to the decision of the case. Nor do we think it is sustained by the authorities cited. It was merely stated for the purpose of showing how unjust it would be to bind without a hearing. The court, in that case, ordered the junior encumbrancer to be made a party. We think there is nothing decided in those cases in conflict with our present ruling, but if anything had been so decided, we would unhesitatingly refuse to follow it, in view of the great weight of authority the other way, unless compelled to do so because it may involve a question of title. But we are not confronted by any such situation. If we have decided in any case the very question not presented contrary to what we now decide, the precedent will be controlling (190) so far as to protect any titles or vested interests which have been acquired upon the faith of it. Parties have the right to act upon the decisions of this Court in acquiring titles, and such titles will not be disturbed or the parties prejudiced by a subsequent reversal of the decision. We have so held in two recent cases: Hill v. R. R., 143 N.C. 539;Hill v. Brown, 144 N.C. 117. Such a rule is based upon an ancient maxim of the law, is a just one and should be perpetuated. Broom Legal Maxims (8 Ed.), 34, 35. Further, we will say that the principle of this decision will not apply to a subsequent mortgagee whose mortgage is not registered. This application of the rule to such a case would be intolerable. If parties withhold their deeds from registration, they must take the consequences of their own neglect. The law abhors secret liens, and it is now the firmly established policy of this State, and has been since 1885, to require the registration of deeds and other instruments and to protect innocent purchasers against the claims of those who have not complied with the law. Pell's Revisal, sec. 979-981 and notes; Acts of 1885, ch. 147.

It is suggested that the rule applied in this case does not obtain in States where the legal title is held to pass by the conveyance to the mortgagee, as in this State, but only in those where a mortgage is considered merely as a lien, or a security for the payment of the debt. But an examination of the authorities will disclose that they recognize no such distinction. In the States of New Jersey, Connecticut, Maryland, Illinois, Ohio, and others, from the reports of which we have cited cases, it has been held that the legal title passes to the mortgagee. 20 A. E. Enc. (2 Ed.), 900 and note 5. The rule rests upon the reasonable assumption that the junior encumbrancer has an interest which should be protected by the courts, and which can not be taken from him or impaired without notice and an opportunity to be heard. "It has long been the received rule (expressed in the maxim audi alteram partem), that no one is to be condemned, punished or deprived of his property in any judicial proceeding, unless he has had an opportunity of being heard." Broom Legal Maxims (8 Ed.), 112.

The defendant Williams further contends that he had as good a title as if he had foreclosed under the power of sale, as the court in the foreclosure suit was merely selling in accordance with the (191) power by substituting a commissioner in the place of the mortgagee, and that therefore Dunn v. Oettinger, 148 N.C. 276, where the trustee sold under the power, applies. But this contention is squarely met by our recent decision in McLarty v. Urquhart, 153 N.C. 339, in which Justice Brown says: "Notwithstanding the power, the mortgagee may invoke the aid of the court in foreclosing the equity of redemption instead of resorting to the power. Likewise in case of complications, the mortgagor has frequently resorted to the courts for protection and compelled foreclosure under their protection. Capehart v.Biggs, 77 N.C. 261; Kornegay v. Spicer, 76 N.C. 96; Whitehead v.Helen, 76 N.C. 99; Kidder v. McIlhenny, 81 N.C. 131; Manning v.Elliott, 92 N.C. 51, are precedents in point. This plaintiff preferred to seek aid of the court to foreclose instead of pursuing the power contained in the instrument. Had he pursued the latter he must follow its provisions substantially, but the court is not bound to follow them. Its power to foreclose is not derived from the power of sale in the mortgage. It could decree foreclosure if the instrument contained no such power." The court acts under its general equity jurisdiction and proceeds to grant relief irrespective of the stipulations contained in the power of sale. It pursues its own course and practice without any restraint by reason of the power of sale contained in the deed, so as to administer the rights of the parties according to law and its own equitable procedure, acting under its own powers and jurisdiction and not by virtue of any contractual power given in the mortgage or deed of trust. But it must not be overlooked that the defendant Williams did not acquire the legal title to the land by the assignment of the notes and mortgages to him. The notes were transferred and the mortgage, but without any conveyance sufficient to transfer the legal title of the mortgagee. Williams v.Teachey, 85 N.C. 402; Dameron v. Eskridge, 104 N.C. 621; Husseyv. Hill, 120 N.C. 312; Morton v. Lumber Co., 144 N.C. 31 (S.C.,152 N.C. 54); Modlin v. Insurance Co., 151 N.C. 35. "In some of the States a mortgage is held by statutory regulation or judicial construction to be simply a lien, leaving the legal estate in the mortgagor. (192) In North Carolina and many other States the common law prevails, and the mortgage deed passes the legal title at once, defeasible by subsequent performance of its conditions." Lumber Co. v.Hudson, 153 N.C. 96. This being so, and it is conceded in the defendant's brief that it is so, the assignment of the note and mortgage did not vest the legal title to the land in Williams, nor the power of sale as incident of it. Norman v. Hallsey, 132 N.C. 6; Williams v. Teachey,supra. The legal title and power, therefore, remained in Fred Martin, the mortgagee, and he was not a party to the foreclosure suit. It follows that the court was not proceeding under the power contained in the deed when it ordered a sale of the land. The person having the legal title and power is a party to this suit, and was at the time that Williams took the assignment, and Williams himself was made a party by the service of process before his bid at the sale had been accepted by the court and the sale confirmed. He was a mere proposer until it was accepted and confirmation took place. Joyner v. Futrell, 136 N.C. 301, and cases cited. The sale and deed of the commissioner had no more than the effect of foreclosing the equity of redemption, leaving the legal title outstanding in Fred Martin, the mortgagee. Under all these circumstances, Williams must be adjudged to be bound by the orders and decrees in this suit, so far, at least, as may be necessary to a satisfaction of the plaintiff's claim by foreclosure of his mortgage or otherwise. In other words, whatever rights or interest Williams has, he acquired subject to the plaintiff's lien and the latter may redeem as against him, if his debt has not already been paid or satisfied, and in order to ascertain the status of the several claims an account may be taken, if necessary. We will not even suggest upon what principle the account should be taken, as that must be decided first by the court below, and besides, we can not anticipate what the evidence will be. But we may safely say that the plaintiff is not entitled to recover any more than the amount of his debt, or such portion of the original debt as remains unsatisfied.

There is no analogy between this case and those where sales are made under a power contained in a mortgage or deed of trust, or under an execution issued upon a judgment, for in the former case (193) when the party acts under a power he is proceeding out of court, and in the case of an execution sale he is proceeding under a statutory power or mandate, and the court is not called upon to exercise its equitable jurisdiction and do what is manifest justice as between all parties interested. The plaintiff is merely enforcing a right acquired at law by legal process in accordance with the statute, and that is all. In such cases, third parties must be vigilant and take care of their interests. But when a court of equity or a court having equitable jurisdiction, is invoked to grant relief quite a different case is presented. It strives to do justice and will not deprive a party of his property without a hearing. The distinction is too familiar and manifest to require further elucidation. Menzel v. Hinton, 132 N.C. 660; Cone v. Hyatt,132 N.C. 810.

Our conclusion is that the court erred in its rulings. The verdict will be set aside and a new trial granted, the case to proceed further in the court below, in accordance with the law as herein declared.

New trial.