#### J. W. MILLS v. MUTUAL BUILDING & LOAN ASSOCIATION, a CORPORATION, and E. Y. KEESLER.

(Filed 3 January, 1940.)

1. Mortgages § 32a—

A declaration in a deed of trust of the trustee’s right to take possession upon default does not require that the trustee take possession as a condition precedent to foreclosure under the power of sale contained in the instrument.

2. Same—

The exercise of the power of sale in a mortgage or deed of trust will be scrutinized by courts of equity for the protection of the mortgagor, and the power must be exercised under well recognized restrictions.

3. Mortgages § 35a—

When a mortgagee purchases at Ms own sale, the sale is voidable at the-election of the mortgagor, and the trust relationship continues regardless, of good faith and absence of fraud, the rule being founded upon the-opportunity of oppression arising out of the relationship.

4. Mortgages § 17—

A mortgagee is entitled to possession upon default, but he must account to the mortgagor for rents, profits and waste, the mortgagor being entitled to credit therefor on the mortgage debt.

5. Mortgages § 39e—

Where a mortgagee purchases the property at his own foreclosure sale- and thereafter sells to an innocent purchaser, the mortgagor may elect to-disavow the foreclosure sale and recover damages for the wrongful conversion of his equity of redemption.

6. Mortgages §§ 18, 35a — Right of cestui to hid in property is predicated upon duty of trustee to act impartially and protect rights of both parties. *

A trustee in a deed of trust is agent for both the. trustor and *cestui que trust,*and upon default he is not only under duty to make due advertisement, conduct the sale and execute the deed to the purchaser, but is also-under duty to apprise both parties of his intention to sell, to exercise-good faith, act impartially, and to exercise due diligence to procure an advantageous sale for the protection of both parties, and the right of the *cestui que trust*to bid in the property is predicated upon this duty and the fact that its exercise precludes the opportunity for oppression of the debtor by the creditor.

*6657. Mortgages §§ 35a, 39e — Evidence that trustee acted as agent oí cestui in bidding in property held for jury in trustor’s action for damages.

Plaintiff’s evidence tended to show that the trustee named in the deed of trust was the secretary-treasurer and chief active executive officer of defendant *cestui que trust,*and as such executive officer was the person to whom the trustor would have to apply for any forbearance, that it was his duty to direct foreclosure to make or direct advertisement and sale and execute deed to the purchaser and to determine the bid of the *cestui que trust*if it desired to bid at the sale, and that in the present instance he wrote the memorandum of the amount the *cestui*should bid, which was signed by his subordinate, and that the property was purchased by the *cestui*for this sum at. the foreclosure sale, and thereafter sold by it to an innocent purchaser. *Held:*Equity looks to the substance and not the form, and the evidence discloses that the instrument was in effect a mortgage within the scope of the rule prohibiting purchase of the property at the foreclosure sale by the mortgagee, and judgment as of nonsuit was improvidently entered in plaintiff trustor’s action for damages for wrongful conversion of his equity of redemption.

Stacy, C. J., concurring.

Claekson, J., concurring.

Appeal by plaintiff from *Johnston, Special Judge,*at May Extra Term, 1939, of Mecklenburg.

Beversecl.

Civil action for an accounting and to recover damages for breach of trust for wrongful conveyance of real property purchased by defendant •corporation at foreclosure sale and resold to an innocent purchaser.

In June, 1924, plaintiff purchased from E. 0. Talley a house and lot in Charlotte, subject to a first mortgage lien thereon in favor of the defendant corporation to secure an indebtedness of $3,500.00 upon which there was then due $2,134.71. There were also outstanding two other mortgage liens in the sum of $1,936.62 and $1,328.67, respectively, which were assumed by the plaintiff. By payments and refinancing, from time to time, the plaintiff reduced the total indebtedness to $2,100. On 1 November, 1932, he executed a paper writing in the form'of a deed ■of trust to the defendant E. Y. Keesler, as trustee, to secure a note in that amount, payable to the corporate defendant. There was default in the payment of the regular installments maturing on the last cited note and by reason thereof the trustee, after advertisement, foreclosed the instrument by sale 4 May, 1936, and on 16 May, 1936, conveyed said premises, by deed of foreclosure, to the corporate defendant, the purchaser at the sale. On 8 October, 1938, the corporate defendant conveyed the premises to O. P. Wood and wife by fee simple deed.

The purchase price at the sale was $1,870. The consideration for the sale to Wood and wife is not disclosed but it does appear that at the time the corporate defendant took a purchase money mortgage, or deed of trust, on the premises in the sum of $3,300.

*666Tbe defendant Keesler, tbe trustee named in tbe instrument dated 1 November, 1932, securing tbe indebtedness of tbe plaintiff to tbe corporate defendant, was secretary and treasurer of tbe corporate defendant in. charge of personnel of its office. As sucb it was bis business to handle-savings and make loans and be was tbe active officer in charge of its business. He conducted tbe sale, as trustee, and entered tbe bid at tbe sale for tbe corporate defendant. ’ At tbe time be bad in bis possession tbe following written memorandum made out in bis own bandwriting but signed by tbe assistant secretary, to wit:

“MEMO

Mutual B. & L. AssociatioN

119 East Third Street

Charlotte, N. 0.

5/4/36

E. Y. Keesler, Trustee

This is to be considered our bids as indicated for properties to be foreclosed by you this day:

Delane, Preston & Ross. 900 to 1155

“ “ “ ... 900 to 1155

Mrs. Alice Hutchinson. 490 to 523

J. W. Mills. 1870

W. B. Webster.2000 to 2650

Mutual B. & L. Ass’n.

by G. Meb Long, Asst. Secy.”

*Í*Tbe corporate defendant having conveyed tbe property formerly belonging to tbe plaintiff to an innocent purchaser, tbe plaintiff instituted this action to recover rents and profits received, or which should have been received, by tbe defendants from tbe date of tbe foreclosure sale to tbe date of tbe conveyance to Wood, during which time tbe defendants were in possession thereof, and for damages for tbe wrongful conversion of bis equity in said land.

At tbe conclusion of tbe plaintiff’s evidence in chief, on motion of tbe defendants, tbe court below entered judgment dismissing tbe action as of nonsuit. Plaintiff excepted and appealed. |

*Thaddeus A. Adams and J. Louis Garter for plaintiff, appellant.*

*H. L. Taylor and Chas. Brenizer for defendants, appellees.*

Barnhill, J.

1 Tbe instrument tbe plaintiff executed to secure tbe indebtedness to tbe corporate defendant contained tbe following provisions : “It being distinctly understood and agreed by tbe parties hereto *667that in tie event of default in compliance with tbe terms hereof for a period of thirty days that the party of the second part shall be entitled to enter into possession of said lands for the purpose of collecting the rents and profits arising therefrom and applying the same upon the debts hereby secured, and he is hereby authorized and empowered so to do without formality or process of law. But if the said party of the first part shall make default in the payment ... or shall make default in any of the aforesaid stipulations . . . then, and in such event, the said E. T. Keesler shall have the right, and it shall be his duty when requested by the party of the third part, to immediately enter upon and take possession of said premises hereby conveyed and sell the same at public auction, etc.”

The plaintiff contends that the provision permitting the grantee to take possession upon default makes the taking of possession a condition precedent to the right to foreclose. This contention cannot be sustained. Upon default of the mortgagor the mortgagee is entitled to possession. *Weathersbee v. Goodwin,*175 N. C., 234, 95 S. E., 491; *Montague v. Thorpe,*196 N. C., 163, 144 S. E., 691. The declaration of this right in the instrument does not preclude foreclosure prior to entry and assumption of possession. We do not consider the Massachusetts cases cited by plaintiff binding on us under the laws of this State.

(Originally there could be no foreclosure of a mortgage except through a suit in equity. “The idea of allowing the mortgagee to foreclose the equity of redemption by a sale made by himself, instead of a decree for foreclosure and a sale made under the order of the court, was yielded to after great hesitation, on the ground that in a plain case when the mortgage debt was agreed on and nothing else was to be done except to sell the land, it would be a useless expense to force the parties to come into equity when there were no equities to be adjusted, and the mortgagor might be reasonably assumed to have agreed to let a sale be made after he should be in default.” *Kornegay v. Spicer,*76 N. C., 95; *Eubanks v. Becton,*158 N. C., 230, 73 S. E., 1009.

The right of the mortgagee to foreclose a power of sale contained in the instrument is now generally accepted. However, as there are many opportunities for oppression in the enforcement of such power, courts of equity are still disposed to scrutinize the exercise thereof for the protection of the mortgagor. *Eubanks v. Becton, supra.*This right, now, as in the beginning, must be exercised under well recognized restrictions. A mortgagee may not purchase at his own sale; if he does so, he does not acquire an absolute estate. The sale does not alter the relation of mortgagor and mortgagee existing between the parties. *Whitehead v. Mellen,*76 N. C., 99; *Shew v. Call,*119 N. C., 450; *McLeod v. Bullard,*84 N. C., 531; *Howell v. Pool,*92 N. C., 450; *Dunn v. Oettinger Bros.,**668148 N. C., 276; *Rich v. Morisey,*149 N. C., 37. Snob sale is voidable at the election of the mortgagor. *Joyner v. Farmer,*78 N. C., 196; *Gibson v. Barbour,*100 N. C., 192; *Rich v. Morisey, supra; Owens v. Mfg. Co.,*168 N. C., 397, 84 S. E., 389; and may be disavowed by the mortgagor. *Austin v. Stewart,*126 N. C., 525. While the mortgagee, upon default, is entitled to possession as against the mortgagor, *Weathersbee v. Goodwin, supra; Montague v. Thorpe, supra;*he is responsible to the mortgagor for rents and for all acts and omissions as a tenant, the mortgagor being entitled to credit on the mortgage debt for rents, profits and damages; *Morrison v. McLeod,*37 N. C., 108; *Green v. Rodman,*150 N. C., 176, 63 S. E., 732; and when the mortgagee has-purchased at his own sale and then reeonveyed the property to an innocent purchaser the mortgagor may elect to disavow the foreclosure sale-an! recover damages for the wrongful conversion of his equity of redemption. *Warren v. Susman,*168 N. C., 457, 84 S. E., 760; *Davis v. Doggett,*212 N. C., 589, 194 S. E., 288.

In the enforcement of these restrictions by courts of equity it has now become well established that although mortgages with power of sale are not looked upon with as much disfavor as they once were, still, courts of equitable jurisdiction will guard the rights of the mortgagor with jealous-care and the rule generally prevails that a mortgagee with power to sell is a trustee, and, as such, is not allowed to purchase at his own sale so-as to render the sale binding or cut off the equity of redemption. A mortgagee cannot be both vendor and purchaser, and if he purchases at. his own sale, he is still a trustee for the mortgagor. It is not of moment that in purchasing he was wholly innocent and free of fraud. 19 R. C. L., Mtges., sec. 425. It is the opportunity for oppression that such conduct presents which invokes the equitable prohibition. *Davis v. Doggett, supra.*

That it is inequitable to permit a mortgagee to purchase the mortgagor’s equity of redemption apparently was first declared (inferentially) by this Court in *Lee v. Pearce,*68 N. C., 76, and in express terms in *Whitehead v. Hellen, supra.*The principle was fully discussed and reaffirmed in *McLeod v. Bullard, supra.*

The restrictions upon the creditor in respect to the security when the conveyance was made directly to him in the form of a mortgage brought about the creation of deeds of trust as a. more acceptable form of conveying real property for security. This form of security has now come into general and, in some instances, universal use. Pomeroy Eq. Jur., sec. 995; *Reynolds v. Waterville,*92 Me., 292, 42 Atl., 553. When a sale is-had under power in this form of security the creditor may bid at the sale, *McLawhorn v. Harris,*156 N. C., 107, 72 S. E., 211; *Hayes v. Pace,*162 N. C., 288, 78 S. E., 290, 37 L. R. A. (N. S.), 831, for, by *669tbe intervention of a disinterested third party, tbe opportunity for oppression is removed.

Tbe object of deeds of trust is, by means of tbe introduction of trustees as impartial agents of tbe creditor and debtor alike, to provide a convenient, cheap and speedy mode of satisfying debts on default of payment; to assure fair dealing and eliminate tbe opportunity for oppression; to remove tbe necessity of tbe intervention of tbe courts; and to-facilitate tbe transfer of tbe not.e or notes secured without tbe necessity for a similar transfer of tbe security.

Tbe relaxation of tbe strict rules equity imposes upon tbe mortgagor in relation to deeds of trust is predicated upon tbe theory that tbe trustee is a distinterested third party acting as agent both of tbe debtor and of tbe creditor, thus removing any opportunity for oppression by tbe creditor and assuring fair treatment to tbe debtor. He is trustee for both debtor and creditor with respect to tbe property conveyed. A creditor can exercise no power over bis debtor with respect to such property because of its conveyance to tbe trustee with power to sell upon default of tbe debtor. *Simpson v. Fry,*194 N. C., 623, 140 S. E., 295; *Woodcock v. Merrimon,*122 N. C., 731; *Hinton v. West,*207 N. C., 708, 178 S. E., 365.

Tbe trustee for sale is bound by bis office to bring tbe estate to a sale under every possible advantage to tbe debtor as well as to tbe creditor. *Johnston v. Eason,*38 N. C., 330, and be is bound to use not only good faith but also every requisite degree of diligence in conducting tbe sale and to attend equally to tbe interest of tbe debtor and tbe creditor alike, apprising both of tbe intention of selling, that each may take tbe means-to procure an advantageous sale. *Anon, case,*6 Mad., 10; *Johnston v. Eason, supra.*He is charged with tbe duty of fidelity as well as impartiality, of good faith and every requisite degree of diligence, of making due advertisement and giving due notice. *Hinton v. Pritchard,*120 N. C., 1; *Davenport v. Vaughn,*193 N. C., 646, 137 S. E., 714; *Chas. Green Real Est. Co. v. St. Louis Mut. House Bldg. Co.,*196 Mo., 358, 93 S. W., 1111. Upon default bis duties are rendered responsible, critical and active and be is required to act discreetly, as well as judiciously, in making tbe best use of tbe security for tbe protection of tbe beneficiaries. *Maryland v. Farmers Loan & Trust Co.,*24 Hun. (N. Y.), 297.

In tbe present case tbe grantee in tbe deed'of trust is tbe secretary-treasurer, manager and chief active executive officer in charge of tbe personnel of tbe corporate defendant, tbe creditor whose debt is secured. As such be negotiated tbe loan; it was bis duty to make collections; upon default it was for him to direct a sale of tbe security; it was to him tbe debtor was required to go to seek indulgence in respect to tbe debt, or a *670delay in tbe date of sale; and it was for him, in case of foreclosure, to either makeAr direct the advertisement and salé. Upon sale under foreclosure it was his duty to execute the deed of foreclosure. Should the corporation desire to purchase at the foreclosure sale it was for him to ascertain and determine the balance due on the debt and the amount to be bid at the sale (and this he undertook to do).

These duties devolved upon him whether the instrument was executed to him, as trustee, or to the corporation in the form of a mortgage.

The evidence in this record indicates that the trustee, in fact, acted both for himself, as trustee, and for the creditor, as its chief executive officer. He, as the chief executive officer, demanded of himself, as trustee, that the property be foreclosed. As trustee, he advertised and sold. As manager of the creditor, he determined the amount to be bid and directed himself, as trustee, to place a bid in that amount. Then, as trustee, he placed the bid for the creditor and made the sale thereon. Prior to the sale he prepared a memorandum in his own handwriting, which was signed by his subordinate, at his direction, authorizing bids at five separate foreclosure sales to be made on the same date. As to four of these he gave himself discretion to bid from a minimum to a maximum amount. While the written memorandum designates only one amount to be bid at the foreclosure of the instrument under consideration, it cannot be gainsaid that if he had the authority to vest in himself discretionary power prior to the sale, he possessed that same discretion at the sale so that he could have bid more if he deemed it wise to do so.

The personality of the trustee, as such, and as the chief executive •officer of the creditor cannot be separated. His duties are dual and inconsistent. He does not and cannot occupy that position of disinterested impartiality which is the foundation stone on which the distinction in the law relating to deeds of trust and mortgages rests. The opportunity for oppression is present with as much potency as when the creditor is the grantee and the instrument is in the form of a mortgage.

Equity regards substance not form and is not bound by names parties may give transactions. *Shoemaker v. Eastern Bank & Trust Co.,*52 Fed. (2nd), 925; *Moring v. Privott,*146 N. C., 558; *Whitehead v. Hellen, supra.*A court of equity seeking to do justice among all parties looks at the spirit and not the form of the transactions. *Trust Co. v. Spencer,*193 N. C., 745, 138 S. E., 124; *Hinton v. West, supra.*“It regards corporate organization objectively and realistically, unencumbered by fictions of corporate identity, and thus, brushing aside form, deals with substance. 1 Fletcher Cyc. Corp., Ferm. Ed., sec. 45.” *Unemployment Compensation Commission v. Coal Co., ante,*6. Having regard for these principles, under the facts of this case, we are led irre*671sistibly to tbe conclusion that an instrument — in form a deed of trust'— executed to the chief active executive officer of a corporation, to secure a debt to the corporation is, in effect, a mortgage, and the law relating to the foreclosure of mortgage deeds rather than the law relating to trust deeds is applicable.

In this conclusion there is no suggestion of wrongdoing on the part of anyone. We merely determine the law to be applied to the facts of this case.

The exception of the plaintiff to the judgment dismissing the action as of nonsuit must be sustained.

Eeversed.

Stacy, C. J.,

concurs in the reversal of the nonsuit, but is not prepared to say that the executive officer of a corporation, though actively in charge of its business, is perforce the corporation, or that a corporation may not maintain its identity separate and apart from its active-executive officer for the purposes here considered. It is possible that the security of a number of titles is dependent upon this distinction, with the public registry silent on the point because not heretofore questioned. Each case should stand on its own base.

Clarkson, J.,

concurring: On the facts in the case I concur in the result that the sale under the circumstances was voidable. I think there should be a trial and a jury should determine as to whether or not the plaintiff was estopped by his conduct to make the contention he now does. The defendant set up the plea of estoppel. Par. 17 of the answer is as follows:

Though plaintiff knew of said sale for such long period of time he allowed the defendant corporation to bear the burden during such period of paying such taxes and repairs without an effort to redeem or buy back ■the property except the overture to buy it back hereinbefore set forth. The plaintiff, if he had any right to redeem said property or to make any claim for damages on account of the defendant corporation’s sale thereof, which defendants deny, has by his actions as aforesaid waived and forfeited such rights and by his conduct as alleged herein is estopped to contest the validity of said public sale made by said trustee to the defendant corporation or the deed executed by the trustee to said defendant corporation in pursuance of such sale or to claim damages on account of the sale of said property by defendant corporation; and defendants plead such waiver and estoppel as a complete bar to plaintiff’s action.

The facts are borne out by the record and stated by the defendant as follows:

*672Corporate defendant is a building and loan association chartered in 1881, organized under the laws of North Carolina with the powers provided-by law, N. C. Code, 5110-5193. The individual defendant is the •duly elected secretary and treasurer of corporate defendant and is a member of its board of directors, loan committee and executive committee. He was trustee in the deed of trust upon which this action arises. The plaintiff is an engineer of 20 years experience with the State Highway and Public Works Commission, receiving a salary of ■$325.00 per month.

The deed of trust in question is dated 1 November, 1932, and secures the payment of $2,100.00 in the 137th class of stock of corporate defendant. Plaintiff’s pass-book designates weekly payments of principal $5.25, interest $2.43, total $7.68. The deed of trust was in the usual form of deeds of trust to secure such loans with power of sale in case of •default in payment of weekly interest on loan, weekly installments on stock pledged, taxes or assessments as they become due besides mentioning other defaults. In such case “the said E. Y. Keesler shall have the right, and it shall be his duty when requested by the party of the third part, to immediately enter upon and take possession of the premises hereby conveyed and sell the same at public auction” after due notice.

Plaintiff, according to his own evidence, was seriously in default: In December, 1933, 25 weeks in installments and interest; 31 December, 1934, 70 weeks, not over seven payments having been made in a year; 31 December, 1935, 73 weeks, about $500.00; no payments at all were made after 9 November, 1935, the sale being made 4 May, *1936, when*he was $702.54, or approximately 90 payments, behind; besides, he was in default 4 years in taxes and one in street assessments, a total arrear-age at the time of sale of $962.82. Part of the time plaintiff collected the rents, but did not pay them to the association. Because of plaintiff’s default, his property was advertised and sold by the trustee under the terms of the deed of trust on 4 May, 1936.

At the foreclosure sale on 4 May, 1936, corporate defendant, through its assistant secretary, made a written bid of $1,870.00, which was the amount of the indebtedness secured by deed of trust and costs of sale, hied with individual defendant as trustee, and this was the high bid at sale. The bid was reported to the clerk 4 May,-1936, and at that time the trustee made the marginal entry requesting bond for increase of bid. The trustee’s deed to corporate defendant is dated 16 May, 1936, and acknowledged by the trustee before a notary public employed by corporate defendant as a clerk who was a stockholder in and borrower from corporate defendant. Three months after the sale and 9 months after any payment had been made by plaintiff, he first appeared at the office •of the association to “see what arrangements could be made,” and to *673inquire wbetber if corporate defendant sold tbe property at a profit it would give bim tbe benefit of tbe profit and if it would convey tbe property back to bim and bow mucb casb would be required in sucb case. E. T. Keesler, tbe secretary and treasurer, said be would be glad to “go into tbe matter.” "Witbin a few days Mr. Keesler wrote bim as follows:

> “I have taken up witb our loan committee tbe question of ‘selling back’ to you your former bouse on Tbomas Avenue tbis city. . . . Although under no obligation to you, yet our committee is willing to *'deed the property lack1*to you at our investment and carry a loan on it in tbe sum of $2,000.00. . . . We will hold tbe proposition open until August 31st.”

Plaintiff received tbe letter in due course of mail but “after August 20, 1936, did nothing . . . until February, 1939,” when be employed a lawyer.

Tbe defendant thereafter held tbe property without sale until October, 1937, one year and 2 months, when it contracted to sell, completing sale October, 1938, 2 years and 2 months after writing plaintiff it would “sell back” tbe property without response from plaintiff. Tbe plaintiff for tbe first time in February, 1939, through bis counsel, notified tbe defendant that be made tbe objections to tbe sale under tbe deed of trust mentioned in tbe plaintiff’s complaint and bis brief. It was then 3^4 years from tbe date of plaintiff’s last payment to defendant association and 7 years since be bad paid taxes on tbe property involved.

In *Joyner v. Farmer,*78 N. C., 196 (199), it is held: “Tbe sale by tbe mortgagee is not void, but only voidable, and can be avoided only by tbe mortgagor or bis heirs or assigns. Washburn, *ante.*Tbe estate of tbe mortgagee acquired by tbe sale, being voidable only, may be confirmed by any of tbe means by which an owner of a right of action in equity may part witb it. (1) By a release under seal, as to which nothing need be said. (2) Sucb conduct as would make bis assertion of bis right fraudulent against tbe mortgagee, or against third persons, and which would therefore operate as an estoppel against its assertion. (3) Long acquiescence after full knowledge, and probably tbis method may be classed witb tbe second, unless it has continued for so long a time that a statute of limitations operates, or there is a presumption of a release. Washburn, *ante;*8 Rich. Eq., 112; 4 Minn., 25; 16 Md., 508; Lewin on Trusts, 651. What length of time would suffice for sucb a purpose is left uncertain upon tbe authorities. White’s Leading Cases in Eq., 158-168; *Mitchell v. Berry,*1 Metc. (Ky.), 602; *Jenison v. Hogford,*7 Pick., 1. Perhaps it may be that tbe statute of limitations of three years on a parol promise may furnish tbe proper rule.” *Lockridge v. Smith,*206 N. C., 174; *Shuford v. Bank,*207 N. C., 428; *Council v. Land Bank,*213 N. C., 329; *Smith v. Land Bank,*213 N. C., 343.

*674The record discloses that the defendant building and loan association has been in existence for nearly 60 years. It is a matter of common knowledge that by its careful, fine and efficient management it has weathered every storm in all these years, including the deflated years, and done more than any other single agency to make Charlotte a city of homeowners. It has loaned millions and millions of dollars and never lost a cent, as has the Mechanics Perpetual Building and Loan Association of that city. Since the organization of these building and loan associations, there are selected by the stockholders each year twelve directors who are business and professional men of the highest type *who serve without pay.*To be a going concern it is absolutely necessary to have its borrowers conform to its by-laws as to prompt payment. In the present case, from the record, defendant corporation, through its officers, was perhaps too lenient to plaintiff. Plaintiff’s last payment to the defendant building and loan association was 3% years and was 7 years in arrears in taxes. There is plenary evidence of estoppel which should be submitted to a jury.