Title: Patel v. Khan

State: wyoming

Issuer: Wyoming Supreme Court

Document:

Patel v. Khan1998 WY 157970 P.2d 836Case Number: 97-84Decided: 12/15/1998Supreme Court of Wyoming

Manesh PATEL and Chandu Patel; Kanti Patel and Sulabha 
Patel, husband and wife; and Key Bank Of Wyoming - sheridan, f/k/a

First Wyoming Bank - Sheridan, Appellants 
(Third-Party Defendants),

v.

Zarif KHAN and Shamin Khan, husband and wife, 
Appellees (Third-Party Plaintiffs).

 

Appeal from the District Court, 
Sheridan County, John C. Brackley, J.

 

Anthony T. Wendtland of 
Davis & Cannon, Sheridan, for Appellants.

Barry G. Williams of 
Williams, Porter, Day & Neville, P.C., Casper, for 
Appellees.

 

Before LEHMAN, C.J., and THOMAS, MACY, GOLDEN, and 
TAYLOR,* JJ.

 * Chief Justice at time of expedited case conference; 
retired November 2, 1998.

 

LEHMAN, 
Chief Justice.

 [¶1] Manesh and Chandu Patel, Kanti and Sulabha 
Patel, and Key Bank (collectively, appellants) challenge the district court's 
entry of summary judgment in favor of appellees, Zarif and Shamin Khan (Khans), 
in a third-party claim for breach of implied covenants in a warranty deed. 
Appellants also contend the district court erred in awarding Khans the 
settlement amount paid to the plaintiff in the underlying claim. We 
affirm.

 

                                             
ISSUES

 

[¶2] Appellants present the 
following issues:

 

I. 
Were Khans constructively evicted from the Motel property by Patrick Green 
("Green") at a time when Green possessed a paramount claim to 
title?

 

II. Does Khans' unauthorized settlement with Green 
preclude them from recovering against Patels and Key Bank for breach of warranty 
under W.S. § 34-2-102 (July 1990 Repl.)?

 

[¶3] The Khans phrase the 
issues as follows:

 

          
A) Was the district court proper in its finding that a breach of implied 
warranty had occurred?

 

B) 
Were the third-party defendants (Appellants here) liable to the third-party 
plaintiffs (Appellees here) in the amount so found by the district 
court?

 

                                              
FACTS

 

[¶4] The undisputed facts 
begin with the sale of a motel in 1984 to James and Dorothy Prell. While 
negotiating the sale, the Prells informed their lender, First Wyoming Bank 
(Bank),1 that they also owed a debt to 
Patrick Green. Upon agreement among the Prells, the Bank, and Green, the Prells 
executed a first mortgage to the Bank and a second mortgage to Green as security 
for the debts.  Both mortgages were 
duly recorded.

 

[¶5] In 1986, the Bank 
instituted a foreclosure action on the property but did not join Green as a 
party to the action. The Bank then purchased the property at the foreclosure 
sale and became the full owner when the Prells did not redeem within the 
statutory time limit. In April 1987, the Bank conveyed the property by warranty 
deed to Kanti and Sulabha Patel. The warranty deed did not mention Green's 
mortgage. In 1989, Kanti and Sulabha transferred possession of the property to 
Manesh Patel and Chandu Patel on a contract for deed. In 1991, having learned of 
the sale to Kanti and Sulabha, Green contacted them and informed them of his 
mortgage interest. Although there was correspondence among Kanti and Sulabha, 
their title insurer, and Green's attorney, no action was taken to satisfy the 
secured debt.

 

[¶6] On September 30, 1993, 
Kanti and Sulabha conveyed the property to Manesh and Chandu. At the same 
closing, Manesh and Chandu conveyed the property to Zarif and Shamin Khan. Both 
conveyances were by warranty deed; neither deed mentioned Green's mortgage. Nor 
did the Patels orally inform the Khans of Green's claim.

 

[¶7] When the note remained 
unpaid in June 1994, Green filed a judicial foreclosure suit against the 
property, naming as defendants the Khans and their lender, First Interstate Bank 
of Commerce. Shortly thereafter, the Khans filed a third-party claim against all 
the Patels and the Bank, alleging breach of the implied covenants in the 
warranty deed. After discussions among counsel for the Khans, the Patels, and 
the Bank, the third-party defendants (appellants) filed a motion for summary 
judgment, maintaining the warranty deed did not cover Green's mortgage interest. 
In the alternative, they alleged Green had no valid right to foreclose without 
first redeeming the property in the initial foreclosure, and therefore there was 
no valid encumbrance on the property.

 

[¶8] After being informed of 
the theories espoused by Patels and the Bank, the Khans elected to settle with 
Green, and subsequently filed an amended complaint on April 24, 1995, seeking 
reimbursement for the settlement amount. The Khans then filed a cross-motion for 
summary judgment. After a hearing on the motions for summary judgment, the 
district court found no issue of material fact and held the Khans were entitled 
to summary judgment as a matter of law. The district court entered its order on 
February 27, 1997, and this timely appeal followed.

 

                                       
STANDARD OF REVIEW

 

[¶9] Summary judgment is 
appropriate when there is no genuine issue of material fact and the moving party 
is entitled to judgment as a matter of law. W.R.C.P. 56(c). This court evaluates 
the propriety of summary judgment using the same standards and materials used by 
the district court, affording no deference to the district court's decision on 
issues of law. Ahearn v. Anderson-Bishop Partnership, 946 P.2d 417, 421-22 (Wyo. 
1997). A grant of summary judgment may be affirmed on any proper legal grounds 
supported by the record. Id. at 422.

 

                                           
DISCUSSION

 

[¶10] The issue in this case 
is whether, as a matter of law, the property was encumbered by Green's mortgage 
at the time Manesh and Chandu Patel conveyed it to the Khans. Wyoming Statute 
34-2-103 (1997) provides:

 

Every deed in substance in the above form [§ 
34-2-102], when otherwise duly executed, shall be deemed and held a conveyance 
in fee simple, to the grantee, his heirs and assigns, with covenants on the part 
of the grantor, (a) that at the time of the making and delivery of such deed he 
was lawfully seized of an indefeasible estate in fee simple in and to the 
premises therein described, and had good right and power to convey the same; (b) 
that the same were then free from all incumbrances; and (c) that he 
warrant to the grantee, his heirs and assigns, the quiet and peaceful possession 
of such premises, and will defend the title thereto against all persons who may 
lawfully claim the same. And such covenants shall be obligatory upon the 
grantor, his heirs and personal representatives, as fully, and with like effect 
as if written at length in such deed.

 

(Emphasis 
added.)

 

[¶11] "[A] mortgage lien is 
an encumbrance." 14 RICHARD R. POWELL & PATRICK J. ROHAN, POWELL ON REAL 
PROPERTY ¶ 900[2], at 81A-136 (1998). A mortgage lien is a claim which is 
enforceable against the land if the obligation which it secures is not otherwise 
paid. Any violation in the nature of a lien or charge on the land is also a 
violation of the covenant that the property is free from all encumbrances. Id. 
at 81A-137. "Such a claim reduces the value of the land because a purchaser, in 
order to protect the land from foreclosure or execution, must pay the amount of 
the obligation." Id.

 

[¶12] To assert a claim for 
breach of the covenant, the grantee must suffer an eviction under a paramount 
title. Actual or constructive eviction is sufficient. Id. at 81A-142-43. In this 
case, the Khans were never physically evicted from the property, but they claim 
a constructive eviction by virtue of Green's foreclosure action. Constructive 
eviction occurs when "there is a positive assertion of paramount title and the 
grantee rightfully yields to the holder of that title * * * by purchasing the 
paramount title or satisfying the encumbrance." Id. at 81A-143. Appellants agree 
that Green's foreclosure action is a positive assertion of paramount title, but 
maintain that Green's claim is not valid. According to appellants, Green's 
interest remained junior to the Bank's first mortgage; thus to foreclose, he 
must first equitably redeem the property. We disagree.

 

[¶13] Despite the 
appellants' assertions to the contrary, the Bank's mortgage interest no longer 
existed at the time the Khans received title; therefore, Green's mortgage had 
priority over all other liens on the property. When a junior lienholder is not 
made a party to a foreclosure, the junior interest is not bound by the 
foreclosure decree, and the lienholder is entitled to exercise his rights as if 
the foreclosure had never taken place. Bolln v. LaPrele Live Stock Co., 27 Wyo. 
335, 341, 196 P. 748, 749 (1921); 4 POWELL & ROHAN, supra, § 37.37[13], at 
37-260.

 

[¶14] Although Green's 
mortgage interest was not diminished by the foreclosure and subsequent sale to 
the Bank because he was not made a party to the action, the Bank's mortgage was 
affected by the doctrine of merger. A mortgage lien vests the mortgagee with an 
equitable interest, while the mortgagor retains legal title to the property. 
Bolln, 27 Wyo. at 341, 196 P.  at 749. When the subsequent actions of the parties 
indicate an intention to combine both the legal and equitable interests in one 
person, the interests will merge and the lien is terminated. Id. at 343-44, 196 
P. at 749-50; First Southwestern Fin. Servs. v. Laird, 882 P.2d 1211, 1216 (Wyo. 
1994) (quoting THOMPSON ON REAL PROPERTY § 4798, at 46 (1981 Supp.) ("Joinder of 
the ownership in land and of the lien thereon in one person creates a merger and 
terminates the lien.")).

 

[¶15] Here, the Bank 
purchased the property after foreclosure and received the Prells' legal title 
subject to the Prells' right of redemption. When the Prells failed to redeem, 
both legal and equitable interests vested in the Bank. The Bank's subsequent 
action, the sale to Kanti and Sulabha, demonstrated an intent that the legal and 
equitable interests merge, thus terminating the Bank's 
lien.

 

General authority recognizes that the question of 
merger is primarily a question of intention and that merger will not take place 
where there is an intention to keep the mortgage alive or, in the absence of a 
showing of an intention to the contrary, where the mortgage is necessary to 
protect the mortgagee from intervening claims or liens of third 
persons.

 

In 
this regard, it has been held that an intent to effect a merger is indicated 
where, after acquiring the equity, the mortgagee conveys the property to an 
unrelated party, constituting convincing evidence that the mortgagee intended to 
effect a merger so that the complete fee then could be transferred to the third 
party. [55 AM.JUR.2D Mortgages] § 1345 at 737-38. * * 
*

 

General authority further recognizes 
that the conveyance of the mortgaged property to the mortgagee in satisfaction 
of the mortgage debt does not necessarily operate as a merger when the mortgagee 
is ignorant of the junior lien. "A different result has, however, been reached 
where the mortgage was discharged with knowledge of the intervening lien. * * * 
" 55 AM.JUR.2D [Mortgages] § 1350 at 741 [1996].

 

Whipple v. Commercial Bank 
of Blue Hill, 6 Neb. App. 249, 572 N.W.2d 797, 801 (Neb. App. 1997) (emphasis 
added and citation omitted).

 

[¶16] It is uncontested that 
Green's junior mortgage was created with the Bank's knowledge; and, therefore, 
the Bank's conveyance to Kanti and Sulabha was clearly consummated with 
knowledge of the junior interest. The result was a merger terminating the Bank's 
lien, and the elevation of Green's interest to that of senior lienholder. See 
Whipple, 572 N.W.2d  at 802-03 ("When a mortgagee takes a deed from the record 
titleholder * * * with knowledge of an intervening lien, the mortgage debt is 
forgiven and the lien securing that debt is canceled as against the intervening 
lien."). Consequently, Green had a valid and enforceable lien on the property at 
the time it was transferred by warranty deed from the Bank to Kanti and Sulabha, 
which remained in effect when the property was transferred from Kanti and 
Sulabha to Manesh and Chandu and, finally, from Manesh and Chandu to the 
Khans.

 

[¶17] The object of the 
covenant against encumbrances is to indemnify a purchaser for any encumbrance on 
the property which must be satisfied or removed. 14 POWELL & ROHAN, supra, ¶ 
900[4], 81A-148. Upon Green's assertion of his rights against the Khans in the 
underlying lawsuit, the Khans suffered a constructive eviction when they yielded 
to Green's paramount title. Thus, Green's encumbrance at the time of the Patels' 
conveyance to the Khans breached the implied covenants in the warranty deed as a 
matter of law.

 

[¶18] Appellants' claim that 
the Khans wrongfully settled with Green is equally without merit. It is true 
that when the Khans elected to settle with Green, they took the chance that the 
Bank or the Patels could have successfully defended against Green's claims. If a 
successful defense had been tendered even after settlement or judgment as 
between the Khans and Green, the Khans could not seek redress from appellants 
because there would be no breach. In this case, however, appellants had the 
opportunity to resist Green's claim through their motion for summary judgment, 
but they failed to present a successful defense.

 

[¶19] The normal method of 
measuring damages for a breach of the covenants in the warranty deed is to award 
the purchaser the amount that he or she has incurred in removing the defect. 14 
POWELL & ROHAN, supra, ¶ 900[4], at 81A-148. Because Green's claim was 
valid, and the Khans were forced to pay to prevent actual eviction, the Khans 
were appropriately awarded reimbursement for their payment to 
Green.

 

                                           
CONCLUSION

 

[¶20] The Bank's mortgage 
lien terminated when, after it acquired both the equitable and legal interest to 
the property, and with knowledge of the junior lien, the Bank proceeded to sell 
the property to a third party. Upon termination of the Bank's mortgage interest, 
Green's mortgage interest remained in effect and was validly asserted when the 
note was due. The Khans rightfully yielded to Green's claim and were entitled, 
as a matter of law, to seek redress from the Patels and the Bank for a breach of 
the covenant warranting transfer of the property free from all encumbrances. The 
district court's entry of summary judgment in favor of the Khans is 
affirmed.

 

FOOTNOTES

  1During the course of these 
proceedings, the First Wyoming Bank became Key Bank of Wyoming. To avoid 
confusion, we use the generic term "Bank" when referring to 
both.