Lepper v. Jackson , 102 Mont. 259 ( 1936 )

The solution of the questions involved herein depends largely upon the construction to be placed upon the provisions of section 9467 of the Revised Codes of 1921. The language of this section is clear and specific. By it there is but one action for the recovery of debt or the enforcement of any right secured by mortgage which must be in accordance with its provisions. The foreclosure action affords full and complete relief to the mortgagee, because it is provided that if the sale of the mortgaged property by the sheriff, and his return of sale, shows that a balance still remains due, judgment can be docketed for the balance against the defendant or defendants personally liable for the debt. The judgment then becomes a lien upon the real estate of such judgment debtor, as in other cases upon which the execution may be issued.

The answer shows that the defendant in this action was a defendant in the foreclosure action, and that a judgment was rendered for the full amount due upon the three notes set out in the complaint, and one of which is the $6,000 note sued upon in this action. After the sale of the property by the sheriff, and a proper return being made by him, a deficiency judgment was entered against Edmond A. Arnold, one of the defendants, for the full amount of such deficiency, to-wit, the sum of $5,190.96, which is the same amount which the plaintiff claims is now due upon the $6,000 note sued upon. In other words, while the plaintiff has a valid deficiency judgment against the defendant, Edmond A. Arnold, in the sum of $5,190.96, he is, in this action, attempting to obtain a judgment against the defendant, W.C. Jackson, in a like amount.

It is our contention that the notes sued upon in the foreclosure action, one of which is the basis for the present action, were merged in the judgment rendered in such foreclosure action. The doctrine of merger is clearly announced in 34 C.J., at page 752, as follows: "A claim or demand being put in suit and passing to final judgment is merged or swallowed up in the judgment; loses its vitality and cannot thereafter be used either as a cause of action or as a setoff unless the statute otherwise provides; and this rule applies to a final decree in a court of equity." This rule so announced is supported by the following authorities: Frost v. Thompson, 219 Mass. 360,106 N.E. 1009, at page 1011; Manhattan Trust Co. v. Trust Co. ofNorth America, 107 Fed. 328, 4 C.C.A. 322; Brown v.Fletcher, 182 Fed. 963, 105 C.C.A. 425; Ward v. Haggard,75 Ind. 381; Rossiter v. Merriman, 80 Kan. 739, 104 P. 858, 24 L.R.A. (n.s.) 1095; Price v. First National Bank,62 Kan. 735, 64 P. 637, 84 Am. St. Rep. 419; 2 Black on Judgments, 2d ed., 675; Redden v. First National Bank, 66 Kan. 747,71 P. 578; Schuler v. Israel et al., 120 U.S. 506, 7 Sup. Ct. 648,30 L.Ed. 707. In 34 C.J., at page 750, it is said: "A judgment rendered by a court of competent jurisdiction on the merits is a bar to any future suit between the same parties or their privies, upon the same cause of action, in the same or another court, so long as it remains unreversed and not in any way vacated or annulled."

The notes sued upon in the foreclosure action constituted under our statute joint and several obligations, so that the plaintiff in that case could have, if he had elected to do so, sued one of the makers severally, but instead of this he elected to treat the notes as joint obligations and he sued both of the makers jointly and secured a judgment in rem against both defendants for the full amount of the debt; this judgment, in legal effect, was also a judgment in personam against Arnold, who was personally served with summons. After the sale of the mortgaged property, a deficiency judgment was entered against Arnold for the full amount unpaid, as is authorized by section 9467, supra.

It has been held that the holder of a mortgage, having obtained a decree for deficiency in a foreclosure suit, could not thereafter maintain a suit at law for the balance due on the note. (Cragin v. Ocean Lake Realty Co., 101 Fla. 1324, 135 So. 795; on rehearing affirming judgment, 133 So. 569; followed in Mabson v. Christ, (Fla.) 134 So. 43; Younghusband v.Ft. Pierce Bank Trust Co., 100 Fla. 1088, 13 So. 725.)

It is our contention that the plaintiff in the foreclosure suit, having procured a deficiency decree against Arnold, one of the defendants, thereby released the other defendant, W.C. Jackson. (See 42 C.J. 294; Traveler's Ins. Co. v. Mayo,170 Ill. 498, 48 N.E. 917; United Oil Gas Co. v. Alberson,43 Ind. App. 626, 88 N.E. 359; United Gas Oil Co. v.Ellsworth, 43 Ind. App. 670, 88 N.E. 362; Belle MeadeDevelopment Corp. v. Reed, 114 Fla. 300, 153 So. 843.)

The note sued upon in this case, having been merged in the judgment in the foreclosure action, has ceased to exist as an evidence of indebtedness, and, therefore, it cannot be used as a ground of action; thereafter the judgment was the only evidence of the debt secured by the mortgage, and plaintiff having no other foundation for this action than the original note, must fail. (Lawrence v. Beecher, 116 Ind. 312, 19 N.E. 143.)

Counsel for respondent in the lower court relied upon the following cases: Craig v. Burns, 65 Mont. 550, 212 P. 856,Blumberg v. Birch, 99 Cal. 416, 34 P. 102, 37 Am. St. Rep. 67, and Boucofski v. Jacobsen, 36 Utah, 165, 104 P. 117, 26 L.R.A. (n.s.) 898. We submit, however, that the reasoning of these cases and the conclusions reached are not applicable to the facts of the case at bar. In each there were only nonresident mortgagors, and personal service could not be made upon them, so that a valid personal judgment or deficiency judgment could not be entered against any of the defendants. For this reason it was held in effect that there was no merger of the note or notes in the judgment, which merely found the amount due upon the foreclosure, and ordered the mortgaged property sold and the proceeds of the sale applied upon the debt. There being a deficiency after the sale which could not be entered up as a deficiency judgment, the court held that a suit could be brought by the defendants for the balance still due. In each one of these cases the court did not have jurisdiction of the person, but only of the property, and, therefore, no judgment in personam could have been rendered. Each of the cases was clearly an action in rem and not inpersonam. (Pennoyer v. Neff, 95 U.S. 714, 24 L.Ed. 565.) These cases are readily distinguishable from the case at bar, because here there was personal service made upon one of the defendants who was liable for the debt, and after the sale a valid deficiency judgment for the full amount yet due was entered against this defendant so personally served, which constituted a lien upon the real estate of such judgment debtor, as in other cases on which execution may be issued. These facts bring us clearly within the rule announced in 42 C.J. 294. The foreclosure of a real estate mortgage is essentially an action in rem. Its purpose is to apply the proceeds from the sale of the security to the payment of the mortgage indebtedness.

It is true that by section 9467, Revised Codes 1921, there is but one action for the recovery of debt, or the enforcement of any right secured by a mortgage. Because of this statute, if it is desired to hold a mortgagor personally served within the jurisdiction of Montana liable for the indebtedness if any remain after the sale of the mortgaged property, a deficiency judgment must be entered in the foreclosure proceeding. It is by reason of this statute that this plaintiff was compelled to seek a deficiency judgment against Edmond A. Arnold; otherwise he would have waived his recourse against Arnold personally. Had both Arnold and defendant Jackson been served with summons in Montana so that the court had jurisdiction of the person of each, we would have no quarrel with the argument in appellant's brief because a failure to seek a deficiency judgment against Jackson would then have been a waiver of Lepper's right to hold him personally responsible. But defendant Jackson was not served with summons in Montana. He was served in the state of California, and the district court in the mortgage foreclosure proceeding had no jurisdiction of his person. The court merely had the right to foreclose his interest in the mortgaged real estate, and, therefore, in the light of the decisions following, it was necessary for plaintiff to seek his recourse against defendant Jackson for the balance of the indebtedness in a separate and subsequent suit.

Where a mortgage on real property is foreclosed and the property does not sell for an amount sufficient to satisfy the debt, the fact that a deficiency judgment could not be entered against a nonresident mortgagor upon whom constructive service of summons had been made did not have the effect of discharging the debt, but in such case the unpaid portion affords ground for a separate action to recover it. (Craig v. Burns, 65 Mont. 550,104 P. 117; Blumberg v. Birch, 99 Cal. 416, 34 P. 102;Boucofski v. Jacobsen, supra; Neely v. Miller, 31 Ariz. 201,251 P. 445.)

Appellant argues in his brief that his liability on the promissory notes given to Lepper was merged in the judgment of foreclosure in the district court of Custer county. The principle of merger, however, applies only where the identical cause of action has passed into a judgment in a litigation between the same parties and plaintiff has had full and complete opportunity to recover his whole demand on the cause of action. In the case which we are now considering Lepper did not have full and complete opportunity to recover his whole demand against Jackson on the cause of action for the reason that Jackson was not personally served with process in the state of Montana, and no deficiency judgment could legally have been entered against him. (Houdek v. Brick, 124 Kan. 77, 257 P. 753.)

From the foregoing we believe it clear that, where a mortgagor is beyond the jurisdiction of the court and served by constructive process, the unpaid portion of the mortgage indebtedness after foreclosure is ground for a separate action.

The question may properly be asked the appellant in reply to this argument: What opportunity did the plaintiff in the case which we are now considering have to secure a personal judgment against the defendant Jackson in the foreclosure proceeding? In the first place, the district court of Custer county had no jurisdiction of Jackson and could not legally authorize a deficiency judgment; and in the second place, if the court had done so, such judgment would have been void, and could not have been the basis of any right in the future.

It is a maxim of jurisprudence, enacted into statute in Montana, that "For every wrong, there is a remedy" (sec. 8752, Rev. Codes 1921). It must be admitted that plaintiff had no recourse other than the foreclosure of the mortgage in Montana, because it is in this state that the real estate is situated. The defendant Jackson was a necessary party in the foreclosure proceeding for the reason that he was one of the makers of the note and mortgage and a joint owner of the real estate. It would be a miscarriage of justice if it were the rule that one comaker of a note and mortgage may disclaim immunity for the payment of his debt merely because he resides outside of the state where the mortgage must be foreclosed and where the other comaker of the note and mortgage lives. Appeal by W.C. Jackson, defendant, from a judgment in favor of Benjamin F. Lepper, plaintiff, in an action on a promissory note.

In 1920 Jackson and E.A. Arnold executed and delivered to Lepper three notes for $20,000, $6,000 and $5,000, respectively, all payable in three years from date, with interest and secured by a mortgage on a business block in Miles City belonging to the makers of the notes jointly. The interest on the notes was paid for a period of ten years, but no part of the principal or interest was thereafter paid.

In 1933 Lepper instituted foreclosure proceedings and secured personal service on Arnold and others, made parties to the suit, but, as Jackson then lived in California, was compelled to secure service on Jackson by publication. The suit resulted in judgment and decree of foreclosure and order of sale of the mortgaged property in satisfaction of the judgment in the sum of $35,005.21. On decretal sale the property brought but $30,000, which, after deducting costs, was credited on the judgment, and a deficiency judgment in the sum of $5,190.96 was entered against the defendant Arnold.

On the trial the three notes were introduced in evidence, and, on entry of judgment, were indorsed by the clerk "Merged in Judgment," but, when the mortgaged property sold for less than the amount of the judgment, the $20,000 and $5,000 notes were canceled as paid, and the balance remaining, or $509.04 was indorsed as a payment on the $6,000 note.

On May 1, 1934, Lepper commenced action on the last-mentioned note, alleging merely its execution, ownership in the plaintiff, and nonpayment, except as to the sum indorsed thereon, and prayed judgment for the sum of $5,190.96, with interest from October 17, 1933. By answer, Jackson admitted the execution of the note, but denied the remaining allegations of the complaint, and alleged that plaintiff is no longer the owner of the note, as it ceased to exist by being merged in the judgment. By way of special answer the defendant set up the facts concerning the foreclosure and sale and entry of deficiency judgment against Arnold, and alleged that the foreclosure decree is res judicata and constitutes a bar to this action, and that, by electing to foreclose the mortgage and enter the deficiency judgment against Arnold, the plaintiff waived any right to a personal judgment against defendant.

The court sustained a demurrer to the special defense and a motion to strike the affirmative allegations from the general answer, but permitted the introduction of the judgment-roll in the foreclosure suit in evidence, so that all the facts above set forth are before us for consideration.

It does not appear from the record that any part of the deficiency judgment has been paid or that such judgment is a lien upon any real property of the judgment debtor, Arnold.

In appealing from the judgment against him, Jackson has made ten specifications of error, based on the rulings of the court on the pleadings and introduction of evidence and the findings of the court, but the sole question for determination is summed up in counsel's statement that "it is our contention that the plaintiff in the foreclosure suit, having procured a deficiency judgment against Arnold, one of the defendants, thereby released the other defendant, W.C. Jackson." It is contended that this result follows inevitably from the provisions of section 9467, Revised Codes 1921, regardless of whether or not the action therein described results in a satisfaction of the debt secured by mortgage.

Section 9467 declares: "There is but one action for the[1] recovery of debt * * * secured by mortgage upon real estate, * * * which action must be in accordance with the provisions of this chapter. In such action the court may, by its judgment, direct the sale of the encumbered property * * * and the application of the proceeds of the sale, * * * and if it appear from the sheriff's return that the proceeds are insufficient, and a balance still remains due, judgment can then be docketed for such balance against the defendant or defendants personally liable for the debt, and it becomes a lien upon the real estate of such judgment debtor," etc.

The obvious purpose of the statute is to compel one who has taken security for his debt to exhaust his security before resorting to the general assets of the debtor (State SavingsBank v. Albertson, 39 Mont. 414, 102 P. 692; Leffek v.Luedeman, 95 Mont. 457, 27 P.2d 511, 91 A.L.R. 286); such a creditor cannot waive his security and sue on the debt (Largey v. Chapman, 18 Mont. 563, 46 P. 808), except by the forbearance of the debtor, who may plead the mortgage as a bar to plaintiff's action, and it becomes such a bar unless the plaintiff can thereafter show that the security, through no fault of his, has become worthless (Vande Veegaete v. VandeVeegaete, 75 Mont. 52, 243 P. 1082).

When the statute is followed and the court has secured[2, 3] jurisdiction over the person of the debtor, or debtors, and the property, the debt is merged in the judgment and decree rendered, and though the property may not bring sufficient to satisfy the judgment, no further action can be brought on the debt evidenced by the note. The judgment creditor's remedy is to have a deficiency judgment entered against the judgment debtor or debtors. The deficiency judgment becomes a personal judgment against the debtor properly before the court, and, if the judgment creditor voluntarily elects to take personal judgment against one of two joint defendants, equally liable, without in any way preserving his rights as against the other "then equally liable before the court" and against whom he takes only a foreclosure, he must be deemed to have waived his right against these latter, and his deficiency judgment bars a subsequent action against those against whom he could have had personal judgment, had he so desired. Having thus voluntarily waived full satisfaction in a suit in which he was entitled to it, he will not be allowed "to disturb the courts, and vex the parties with many actions." (Travelers' Ins. Co. v. Mayo, 170 Ill. 498,48 N.E. 917, 919.)

The defendant asserts that this rule applies to such a case as[4, 5] this, wherein personal service was had upon but one of the defendants, citing 42 C.J. 294, where it is said: "Where the holder of a mortgage note files a bill to foreclose against all parties jointly and severally liable thereon and obtains a decree of foreclosure against them but takes a deficiency decree against one defendant only, no disposition being made of the case as to the others, the cause of action merges in the decree and the other defendants are released." The only case cited in support of this text is the Mayo Case, supra, and a reading of the case demonstrates that the text-writer did not intend to convey the impression, gathered from the text, that a defendant against whom a deficiency judgment could not be entered would be released by such procedure, but only that those defendants who were "equally liable before the court," because of the court's jurisdiction over their persons, would be so released.

Counsel cites several cases in this connection announcing the above rule, but in all of them personal service was had, and a judgment in personam could have been entered. It does not follow that where in the "one action" it is impossible to secure full satisfaction of the joint debt, as against one of the joint debtors brought in by substituted service, the debt is extinguished by the foreclosure of the mortgage and the entry of a deficiency judgment against his codebtor.

That the text-writer did not intend the text quoted from Corpus Juris, supra, to go beyond the holding in the Mayo Case cited and declare the rule for which contention is made, is demonstrated by what is said in succeeding sections, and particularly section 1991: "4. Action for Deficiency" (42 C.J. 300), to-wit: "Where the proceeds of the foreclosure sale are not sufficient to satisfy the mortgage debt, and the plaintiff did not recover a deficiency judgment in the foreclosure suit, or was prevented from doing so by want of authority in the court to grant it, want of jurisdiction over the defendant, or other cause, he may thereafter maintain an action against the person liable for such deficiency, basing his action on the note or bond secured by the mortgage." In support of this text cases are cited from many jurisdictions, including our own case of Craig v.Burns, 65 Mont. 550, 212 P. 856, 858, wherein the effect of our statute is discussed, and it is then declared: "But it does not follow that a sale of property for $18,000 satisfies and discharges an indebtedness of $22,000 merely because the judgment debtors are beyond the jurisdiction of the court," and held that in such a case the unpaid portion of the debts remains and affords grounds for a separate action, citing Blumberg v.Birch, 99 Cal. 416, 34 P. 102, 103, 37 Am. St. Rep. 67.

When one person has loaned money to another, the concern of the creditor is repayment; security for the note is merely to insure such repayment as far as possible; when it becomes necessary for the creditor to hale the debtor into court, the object to be accomplished is the collection of the full amount due; the reduction of the security to cash and application on the debt are but a means to the end to be accomplished. Under the law of this state, a mortgage merely creates a lien upon the property of the debtor as such security, and does not vest in the mortgagee any sort of title or estate in the mortgaged land or property. (Morrison v. Farmers' Traders' State Bank,70 Mont. 146, 225 P. 123; Barth v. Ely, 85 Mont. 310,278 P. 1002.) The security given may be adequate or inadequate; if adequate, a sale of the property, or so much thereof as is necessary to satisfy the judgment, extinguishes the debt; the extinguishment of the debt, however, is not by the foreclosure, but by the payment of the full amount due. On the other hand, if the property sells for less than the amount necessary to extinguish the debt, it becomes but a credit on the debt, leaving a balance due from the debtor or debtors to the creditor.

Under the common law, and in the absence of statute, the debtor could only recover on the debt by an action at law; the foreclosure was by suit in equity, in rem, in which the security could be exhausted and the proceeds applied to the debt, but, if not sufficient to satisfy the debt in full, the creditor was relegated to an action at law for the remainder. (Riley'sAdmr. v. McCord's Admr., 24 Mo. 265; Johnson v. Shepard,35 Mich. 115; Cobb v. Duke, 36 Miss. 60, 72 Am. Dec. 157;Cook v. Moulton, 64 Ill. App. 429; Webber v. Blanc,39 Fla. 224, 22 So. 655.)

In the suit in equity, being in rem, jurisdiction may be acquired by substituted service, but, in order to secure a judgment for the balance remaining in an action at law, or, when permissible, the entry of a deficiency judgment, personal service within the jurisdiction is necessary, as such an action is in personam. (Boucofski v. Jacobsen, 36 Utah, 165,104 P. 117, 26 L.R.A. (n.s.) 898; Wright v. Wimberly, 94 Or. 1,184 P. 740.)

Our statute, supra, requires that the suit in rem and the action in personam — the suit in equity and the action at law — be united in the "one action" for the debt secured by mortgage, and no further action will lie to collect any part of the debt, if full satisfaction of the debt, or a deficiency judgment against the debtor or debtors, could have been secured in the "one action." However, it is clearly not intended by the statute to bar the creditor from collecting the full amount of the indebtedness, and, if this cannot be done under the statute because of the nonresidence of the debtor, proceeding against such debtor is, in no sense, a "splitting" of a cause of action, but is an action over after the creditor has exhausted his security and his statutory remedy. Such a creditor still has a right to settlement in full and such an action is justified, if under no other provision of law, under the familiar maxim that "where there is a right there is a remedy." (Blumberg v.Birch, supra.)

Counsel for the defendant cites Ruling Case Law to the effect[6] that a judgment on a joint obligation against one or more joint obligors is a bar to an action against any other joint obligor (15 R.C.L. 783), and it is suggested that to hold otherwise would be to permit two or more judgments to be entered on a single debt. The rule above has no application to the case at bar, as is clearly pointed out in the text from which it is taken, "Judgment as Merger of Cause of Action," it being declared specifically that "the foregoing general rule applies only to cases of joint contracts, and under both the common law and modern practice it does not apply when the contract is joint and several. On such a contract nothing short of satisfaction will prevent the obligee from maintaining as many suits as there are obligors." (15 R.C.L. 788.)

A judgment against one of several makers of a promissory note,[7] jointly and severally liable thereon, does not merge the instrument so as to bar an action thereon against the others. (2 Freeman on Judgments, 5th ed., sec. 571.) Section 9315, Revised Codes 1921, specifically provides for the entry of two or more judgments in a single action when the necessity arises and the liability of the defendants is joint and several. (State ex rel.Stiefel v. District Court, 37 Mont. 298, 96 P. 337, 340.) In the Stiefel Case this court made the declaration, applicable here, that "this case strikingly illustrates the necessity for the rule we are adopting. If only one judgment is to be entered * * * and that judgment determine the rights of all the parties, then it is apparent * * * such judgment * * * cannot be entered until the defendants * * * change their residence * * * to Montana, or voluntarily come to Montana and submit to the jurisdiction of the * * * court."

Jackson neither pleaded nor attempted to show that Arnold had any real estate in Montana on which the deficiency judgment might have become a lien, and, if such a showing could be said to constitute a defense to this action, by his forbearance, at least, he permitted this plaintiff to secure a judgment as on an unsecured note and cannot now say that the plaintiff may have had security or a remedy which he did not exhaust. (Vande Veegaete v. Vande Veegaete, supra.)

For the reasons stated, the judgment is affirmed.

MR. CHIEF JUSTICE SANDS and ASSOCIATE JUSTICES STEWART, ANDERSON and MORRIS concur.