Case Name: ROBERT G. HAYES, Trustee, and NATIONAL FIRE INSURANCE COMPANY v. M. TOMS PACE, Trustee, and K. G. MORRIS
Court: Supreme Court of North Carolina
Jurisdiction: North Carolina
Decision Date: 1913-05-22
Citations: 162 N.C. 288
Docket Number: 
Parties: ROBERT G. HAYES, Trustee, and NATIONAL FIRE INSURANCE COMPANY v. M. TOMS PACE, Trustee, and K. G. MORRIS.
Judges: 
Reporter: North Carolina Reports
Volume: 162
Pages: 288–294

Head Matter:
ROBERT G. HAYES, Trustee, and NATIONAL FIRE INSURANCE COMPANY v. M. TOMS PACE, Trustee, and K. G. MORRIS.
(Filed 22 May, 1913.)
1. Mortgages — Sales—Fraud—Equity.
A court of equity lias power to vacate a foreclosure sale which is shown to have been tainted with fraud or deceit, or to have been made in pursuance of a corrupt scheme to gain possession of the premises inequitably.
2. Same — Assignment of Mortgage — Transfer of Title.
The difference between a mere assignment of a mortgage of lands and the substitution of a trustee is, that the terms of the former do not profess to act upon the lands, or pass the mortgaged estate thereto, but only the security it affords to the holder of the debt; and where a foreclosure sale of the lands had been brought about by collusion and fraud of the holder of the security for the purpose of ■ acquiring the land at the sale, courts of equity will intervene, whether there has been only an assignment of the security or a transfer of the title to the lands to another trustee.
3. Mortgages — Sales—Trusts and Trustees.
The owner of a debt secured in a deed in trust made to a third party as trustee, with power of sale, may lawfully bid and purchase at the sale, where there is no fraud or collusion between the creditor and the trustee.
4. Same — ■ Fraud — Collusive Sales — Liens—Junior Judgment Creditors — Equity.
Where fraud and collusion is shown between the holder of a first mortgage debt in the foreclosure sale of the mortgaged premises, junior mortgagees or lien creditors will be protected by the courts to the same extent as the mortgagor.
5. Same — Injunction.
Where there are a first and second mortgage on lands and several junior judgments for materials furnished for a building thereon, and one of these junior judgment creditors has bought in the lands at an execution sale of another of the junior judgment creditors, and in pursuance of a scheme to get the lands, has procured the assignment of the first mortgage to a trustee, whom he controls, and under his instructions the mortgaged premises were sold, bid in by another of his agents at the foreclosure sale, so that the result pf the scheme is to have obtained the land at a grossly inadequate price, the second mortgagee haying offered to pay off the first mortgage debt and given notice of his rights at the sale: it is Held, that the evidence of fraud is sufficient to be submitted to the jury, and that equity will enjoin the making of the deeds to the purchaser at the sale, and preserve the eqiüties to the hearing of the second mortgagee and the other junior judgment lienors for materials furnished.
6. Mortgages — Notice of Sale — Hour of Sale — Fraud—Evidence— Injunction — Equity—Sale Vacated. N
The failure of the notice of a foreclosure sale under a mortgage to have stated the hour thereof is sufficient evidence of fraud for an order to issue restraining its consummation to the hearing and to preserve- the equities of the parties thereunder arising; and should it then appear that the hour was not thus stated, the sale should be set aside.
Appeal by defendants from restraining order issued by Lyon, J., at chambers, 7 March, 1913; from HeNDEesoN.
Appeal by defendants from an order continuing a restraining order to the final hearing.
Brooks, Sapp ,& Hall for plaintiffs.
Smith, Shipman & Justice for defendants.

Opinion:
Brown, J.
This litigation grows out of the case of C. E. Roper et ais. v. National Fire Insurance Co. et als., 161 N. C., 151. In the present action the judge restrained the defendants from completing the sale of certain lands referred to in the pleadings.
From the pleadings and affidavits in the record these facts appear:
On -26 November, 1908, O. E. Roper and wife executed to A. L. Holmes a deed of trust to secure $3,200 and interest, the land included in the conveyance being a boundary of about 300 acres situated near Hendersonville. The grantors subsequently built a hotel on one of the lots included in the boundary, and gave other mortgages and deeds of trust upon the same property.
On 6 May, 1910, O. E. Roper individually, and as executor of his wife, executed a .deed of trust upon the same property to Smith as trustee for J. M. Stepp, and thereafter procured a fire insurance policy on the hotel to be written by the plaintiff, the National Eire Insurance Company, with a standard mortgage clause payable to J. M. Stepp.
Thereafter the hotel was destroyed by fire, and the National Eire Insurance Company, in obedience to a decree of this Court at its last term, paid the amount due on the mortgage, with interest, to G. H. Valentine, trustee in bankruptcy for J. M. Stepp, and took an assignment of the said deed of trust. That subsequent to the execution of the Stepp deed of trust in 1910, several parties filed liens against C. E. Roper for materials furnished in the construction of his hotel. Subsequently, judgments were taken thereon.
That R. C. Clark was one of these junior judgment holders, having purchased the hotel tract at a sheriff's sale under one of these judgments, known as the Loenhardt and Garren judgment, for the sum of $265, and took deed therefor.
Thereafter, in order to forestall the rights of the National Eire Insurance Company as assignee of the Stepp mortgage, Clark caused an insolvent clerk in his employ, M. Toms Pace, to purchase for him the Holmes mortgage of $3,200, and'interest, and take an assignment of the said mortgage to the said M. Toms Pace as assignee and trustee for Clark.
Eollowing this up, Clark requested Pace, assignee of the Holmes mortgage, to advertise the Roper lands for sale on 14 February, 1913, and engaged K. G. Morris to attend the sale as his agent and bid for the land, with the understanding between himself and M. Toms Pace at the time that it was to be sold in separate lots.
On the day of the sale plaintiffs offered to pay to Pace the entire amount of his mortgage, interest, costs, and expenses, and take an assignment of the mortgage without prejudice to await a settlement of the equities between the parties. This was de-dined. The plaintiffs then requested that the land be sold en masse. This was refused. Immediately after the last lot of land was knocked down to K. G. Morris, he having purchased it all, as per prior agreement, at the price of $394, the plaintiffs offered $4,000. This bid was declined.
Tbe following notice in writing was read by plaintiffs at and immediately preceding tbe sale:
Notice to all Udders and prospective purchasers: Representing a mortgage creditor wbo bolds a deed of trust upon tbe property included in tbe advertisement of tbis sale, I bave offered, and do here and now offer to pay to A. L. Holmes or bis assignee or attorney all tbe principal, interest, cost, and taxes-due bim or them, and for wbieb be or tbey are liable to account at tbis sale, if be or bis representatives will assign tbe said mortgage to me, to be beld without prejudice to await tbe settlement of tbe equities, by tbe court, of subsequent creditors to tbis mortgage. Tbis bas been refused.
I demand that A. L. Holmes and bis representatives conducting tbis sale shall offer all tbe property included in bis mortgage for sale en masse, so that tbe largest possible amount may be obtained from tbis sale, satisfying bis mortgage and providing, if possible, other funds to be distributed among tbe junior creditors of C. E. Roper and 0. E. Roper, executor of E. A. Roper, deceased, tbe makers of tbis mortgage, and against whom tbe junior liabilities exist.
(Signed) Robert G. Hayes.
It appears from tbe affidavits that tbe land is worth $7,000 to $8,000, and that it was bid off for Clark at $394.
It does not appear in tbe record that- Holmes, tbe original trustee in tbe deed in trust, executed a formal deed to Pace, conveying tbe land subject to tbe trusts and with tbe consent of tbe cestui que trust. As tbe record appears, be merely assigned tbe papers to Pace.
However that may be, we think that bis Honor committed no error in continuing the injunction, restraining tbe making of deeds and passing tbe title to Clark upon tbe 'facts disclosed in tbe record.
It clearly appears that Pace was tbe trustee and personal agent of Clark, wbo bad purchased several of tbe mortgages and tbe liens filed upon tbis property, and that be sold tbe property for Clark and to Clark, through another agent, at a price which as stated by this Court in a former case, is calculated to cause tbe bystanders to exclaim tbat be got tbe property for notbing.
We do not controvert tbe proposition, supported by abundant authority, tbat tbe owner of a debt secured in a deed in trust made to a third party as trustee with power of sale, may lawfully bid and purchase at tbe sale, where there is no allegation or evidence of fraud or collusion between tbe creditor and tbe trustee. Monroe v. Fuchtler, 121 N. C., 101.
There is a difference between an assignment of a mortgage and tbe substitution of another trustee in a deed in trust by all tbe parties interested in it.
A mere assignment of a mortgage in terms which do not profess to act upon tbe land does not pass tbe mortgagee's estate in tbe land, but.only tbe security it affords to tbe bolder of the debt. Williams v. Teachey, 85 N. C., 403.
But whatever may be tbe form of tbe assignment by Holmes to Pace, tbe evidence of collusion between Pace and Clark is plenary, and a sale conducted under such circumstances, even by a legal trustee, would not be permitted to stand by a court of equity.
There is no question tbat a, court of equity has power to vacate a foreclosure sale which is shown to be tainted with fraud or deceit, or to have been made in pursuance of a corrupt scheme to gain possession of tbe premises inequitably.
In Jones v. Pullen, 115 N. C., 471, it is said: "There is no question, according to our authorities,, tbat if a mortgagee with power to sell indirectly purchases at bis own sale, tbe mortgagor may elect to avoid tbe sale, and'this without reference to its having been fairly made and for a reasonable price. This is an inflexible rule, and it is not because there is, but because there may be fraud." Gibson v. Barbour, 100 N. C., 192; Froneberger v. Lewis, 79 N. C., 426; Cole v. Stokes, 113 N. C., 270.
In Mosby v. Hodge, 76 N. C., 388, Pearson, C. J., said: "Tbe exercise of tbe power is only allowed in plain cases where there is no complication and no controversy as to tbe amount due upon tbe mortgage, and tbe power is given merely to avoid tbe expense of foreclosing tbe ' mortgage by action, but tbat when there is such complication and controversy tbe court will interfere and require the foreclosure to be made under the direction of the court after all the controverted matters have been adjusted and the balance due is fixed, so that the property may be brought to sale when purchasers will be assured of a title, and not to be deterred by the idea that they are buying a lawsuit."
This case is cited with approval in Menzel v. Hinton, 132 N. C., 670.
Chief Justice Merrimon in Gooch v. Vaughan, 92 N. C., 615, says: "Courts regard.such powers with suspicion and watchfulness, and never fail to scrutinize the exercise of them when it appears that there is ground to apprehend that injustice in any respect is done or about to be done to the mortgagor. The mortgagor is, in an important sense, completely in the power of the mortgagee, and besides, the latter is a trustee, first, to control the property and apply the proceeds of it when sold to the payment of the mortgage debt, and, second, for the mortgagor as to any surplus, and he is held to a strict account."
The junior mortgagee or lien creditor will be protected by the courts to the same extent as the mortgagor.
In 27 Cyc., 1713, it is said: "And where the fraud takes the form of causing the sale to be made for a larger sum than is due, or collusion between the mortgagee and the purchaser, to the injury of the mortgagor's rights, or of misrepresentation and deceit, practiced upon the purchaser, or upon a junior lien-creditor, the sale may be set aside."
The books are full of cases where courts of equity have interfered to guard the rights of mortgagors, junior mortgagees, and lien creditors with jealous care, and have set aside sales made by mortgagees and trustees where manifest wrong and oppression are made to appear.
The affidavits not only show abundant evidence of collusion, and that Pace was Clark's agent, acting for him and under his control, but it appears further that the advertisement of sale mentioned no hour when the sale was to take place.
In 27 Cyc., 469, the rule with respect to the time and place of sale is stated as follows: "The notice must specify the qjlace at which the sale will be held with a degree of certainty that intending bidders will not be misled, but will be able to find it, and it must also give the time of the sale with equal certainty, stating not only the day, but also tbe bour at which it will be held." Fitzpatrick v. Fitzpatrick, 75 Am. Dec., 681.
The omission of such an essential requisite to make a valid sale is strong evidence of a fraudulent purpose to deceive and mislead probable bidders.
This fact alone is sufficient to justify the judge in continuing the injunction, and if it be shown at the final hearing that 'no time of sale was given in the advertisements, the sale should be set aside.
It is a familiar principle of equity jurisprudence that the status of the parties should be preserved pending a trial upon the merits.
The -order continuing the injunction is
Affirmed.