Cowan v. Stoker , 100 Utah 377 ( 1941 )

This is an appeal from an order of the District Court denying the motion of appellant, a junior mortgagee, that certain surplus monies derived from a foreclosure proceeding, instituted by the senior mortgagee, be turned over to the junior mortgagee.

Alvin D. Stoker and his wife, Ragnhild L. Stoker, mortgaged a piece of real property in Davis County: First, to the Federal Land Bank of Berkeley, second, to Naomi Cowan, and third, to Barnes Banking Company (appellant). The Federal Land Bank is in no way involved in this case on appeal, so we shall no longer consider it. Naomi Cowan brought an action to foreclose her mortgage, joining the Stokers and Barnes Banking Company as defendants. Barnes Banking Company whose mortgage was duly recorded failed to answer or plead. The mortgage of Naomi Cowan was foreclosed and the property sold to Barnes Banking Company (appellant), the highest bidder. It immediately appeared upon sale that there would be a surplus of funds after the costs of foreclosure and the claims of the prior mortgagee, Cowan, had been paid, whereupon appellant, Barnes Banking Company served notice on the other parties and presented a motion to the court that the surplus be applied to its claim formerly secured by a junior mortgage on said property. Appellant tendered proof of its notes and mortgage. The mortgagors, Stokers, appeared and opposed the motion, arguing that the surplus should be paid to them. The court ordered the surplus impounded to await further action by the District Court or by this court.

The questions presented in this appeal are: (1) Is a junior mortgagee who is joined and served as a party in mortgage foreclosure proceedings, but who does not plead, entitled to the surplus funds obtained upon sale of the mortgage property? (2) If he is so entitled, may he obtain said surplus upon motion to the court made after the decree of foreclosure? (3) Does the purchase of the real property by the junior mortgagee at the foreclosure sale effect a merger and thereby destroy his right to mortgage security?

A junior mortgagee who is joined and properly served in an action by a senior mortgagee to foreclose his mortgage, whether or not he appears or pleads, is bound by the decree of foreclosure and may not thereafter assert a claim against said mortgaged property. Moss v. Robertson, 56 1-3 Neb. 774, 77 N.W. 403; 2 Wiltsie on Mortgage Foreclosure, 4th Ed., 1011, Sec. 776. Upon foreclosure of the senior mortgage the lien of the junior mortgagee attaches to the surplus of the proceeds of the foreclosure sale. Moss v.Robertson, supra; Robertson v. Brooks, 65 Neb. 799,91 N.W. 709; Continental Ins. Co. v. Reeve, 149 A.D. 835,134 N.Y.S. 78; Carlisle v. Parker, 8 W.W. Harr., Del. 83, 188 A. 67; 42 C.J. 318, Sec. 2025; 19 R.C.L. 656, Sec. 473; 3 Jones on Mortgages, 8th Ed., 685, Sec. 2164; 6 Bancroft's Code Practice and Remedies 6662, Sec. 5097. That a junior mortgagee who has been joined in a foreclosure suit is entitled to a lien against any surplus funds after the costs of foreclosure proceedings and the lien of the senior mortgagee have been paid is well settled. He may maintain an action against the holder of any such surplus to compel payment to him, the junior mortgagee, rather than to the mortgagor. Church, Inc. v. Holmes, 60 App. D.C. 27,46 F.2d 608.

The next question, therefore, is whether appellant adopted the proper procedure to assert its claim in the lower court. Did its failure to answer or plead to the complaint preclude it from claiming the surplus?

"In foreclosing a mortgage where junior mortgagees and incumbrancers are parties defendant, a cross-bill is unnecessary unless affirmative relief is sought. The 4 foreclosure of the prior mortgage affords relief to all subsequent incumbrancers, as they have the right when parties defendant to participate in the distribution of the surplus." (Citing cases.) Soles v. Sheppard, 99 Ill. 616, 621.

In Moss v. Robertson, supra, the court allowed a junior lien holder to open the decree and answer after sale had been ordered, made, and confirmed by a decree of the court and in this way claim the surplus of a foreclosure. But the court said that such procedure, while proper, was not the only proper procedure.

"Any party to the suit having a lien upon the premises subordinate to the mortgage upon which the sale was made may file a notice or petition, stating the nature 5 and extent of his claim * * *." (Italics added.) 3 Jones on Mortgages, 8th Ed., 685, Sec. 2164.

"It appears that the time to assert a right to share in surplus proceeds, if there has been no prior claim, is on the coming in of the return of sale." 6 Bancroft's 6 Code Practice and Remedies, 6664, Sec. 5098, citingClark Leonard Inv. Co. v. Way, 52 Neb. 204, 71 N.W. 1021.

"Claimants of the surplus may ordinarily assert their rights and obtain an adjudication of them on a 7motion or petition filed in the foreclosure action. * * *" (Italics added.) 42 C.J. 322, Sec. 2029.

It is argued on appeal that because the junior mortgagee had a right under Secs. 104-37-29 and 30, R.S.U. 1933, to redeem the mortgaged property, and because it failed to assert its mortgage by cross-bill or other pleading, it was in default and precluded from claiming the surplus. In making this 8 argument respondent relies heavily on Horr v.Herrington, 22 Okla. 590, 98 P. 443, 445, 20 L.R.A., N.S., 47, 132 Am. St. Rep. 648, in which the Oklahoma Court held that a junior mortgagee who had not been joined as aparty in the suit but who had purchased the property at foreclosure sale did not have a lien on the surplus purchase money. That case is clearly distinguishable from the instant case. In the Horr case, the junior mortgagee was not a party to the foreclosure suit, therefore, he was not bound by the decree. Said the Court:

"By the purchase of the land and filing his petition in intervention, he [junior mortgagee] voluntarily abandoned his right to redeem, and sought to attach his lien to the surplus arising from the sale. There are no reasons that we know of whythis could not be done, provided there were sufficient equities to warrant a court of equity in granting such relief; but he was not entitled to it merely as a holder of a junior incumbrance, for the statute * * * fixes his rights under the contract. ``Theonly right of a junior mortgagee, who has not been made aparty to the foreclosure of a prior mortgage, is to redeem the property from that mortgage.'" (Italics added.) Horr v.Herrington, supra.

In the instant case appellant was a party to the suit and therefore bound by the foreclosure decree which "fully barred and foreclosed [appellant] of all right, title, interest, and estate in and to said mortgaged property and * * * fully barred and foreclosed of all equity of redemption therein and thereto." It did not cease to be a party or escape being bound simply by failing to plead. Inasmuch as appellant recognized the seniority of Cowan's mortgage it might have been useless to plead or to assert a claim until it appeared that there was or would be a surplus from the sale.

We hold, therefore, that a motion seasonably made (before proceeds of sale have been distributed), and served on all parties to the suit who are thereafter given an opportunity to plead and be heard, is a proper means for opening up the judgment for the purpose of allowing a junior 9 mortgagee to make claim to surplus funds from a foreclosure proceeding to which he is a party. It is equivalent to a motion to set aside the default and should be so treated by the court, the parties being required, if in the court's discretion the motion is granted, to join issue in foreclosure upon the surplus proceeds of sale. If a motion to set aside the default had been made and issue joined in foreclosure upon the surplus proceeds, we should arrive at exactly the same point to which the present petition brings us if the mortgagee is required to set up his claim and the mortgagor is permitted to plead any defense and a hearing is had thereon. The law is interested not so much in form as in substance.

The mortgagor pledged the land as security for its debt to appellant. The land has been sold to satisfy the claims of a senior mortgagee. We see no reason in law or equity why appellant is not entitled to satisfaction from the 10 proceeds from that land as against mortgagor.

The question of merger has been raised by respondents. They assert that appellant by buying in the land at auction merged his lien on said land into his fee simple title. But respondents have merely stated what occurs when a junior mortgagee, nota party to the foreclosure suit, purchases at 11 foreclosure sale. In this case appellant was a party to the foreclosure suit. Upon foreclosure and sale, it sought to attach its lien to the surplus. This it could do for its lien could no longer be asserted against the land. In these circumstances it matters not that appellant was the purchaser at foreclosure sale. It purchased the land at open auction and paid, theoretically, the market price. Because that market price was more than enough to satisfy the prior mortgagee and costs, a fund came into existence from which appellant might receive part payment on the debt owed to it by mortgagor. It would indeed be inequitable to allow a mortgagor to claim the proceeds from the sale of land which he had pledged as security for a debt to a mortgagee and force said mortgagee to stand by with the debt unsatisfied and see his security vanish under a decree binding on him. Nor is that inequity removed if the mortgagee happens to purchase at the foreclosure sale and he himself has created the surplus.

The District Court is instructed to treat this as a motion to set aside the default, and in so doing if the motion is granted in the court's discretion, appellant should be allowed to plead and offer evidence in proof of his notes and mortgage, and respondent to plead and show cause, if any there be, why it would be inequitable to pay said surplus to appellant.

Costs to appellant.

McDONOUGH and PRATT, JJ., concur.