Title: TRI-COUNTY BANK AND TRUST CO. v. Watts
Citation: 234 Neb. 124, 449 N.W.2d 537
Docket Number: 190
State: Nebraska
Issuer: Nebraska Supreme Court
Date: December 29, 1989

449 N.W.2d 537 (1989) 234 Neb. 124 TRI-COUNTY BANK AND TRUST COMPANY, Appellant, v. Norma L. WATTS, Appellee. No. 88-190. Supreme Court of Nebraska. December 29, 1989. *538 Gerald P. Laughlin, Michael G. Lessmann, and Jill Robb Ackerman of Baird, Holm, McEachen, Pedersen, Hamann &amp; Strasheim, Omaha, for appellant. Terry M. Anderson of Hauptman, O'Brien, Wolf &amp; Hadley, P.C., Omaha, for appellee. HASTINGS, C.J., and BOSLAUGH, WHITE, SHANAHAN, GRANT, and FAHRNBRUCH, JJ. *539 BOSLAUGH, Justice. The plaintiff, Tri-County Bank and Trust Company, formerly known as Southroads Bank (Bank), brought this action in the district court to recover the principal amount of $157,117 plus interest due on a promissory note executed by the defendant, Norma L. Watts, on November 21, 1980. In its petition filed September 20, 1985, the Bank alleged that for value received, Watts executed a note payable to the order of the Bank in the original principal sum of $160,000; that there remained outstanding on the note the principal sum of $157,117 plus accrued interest of $40,631.93; that the note was payable in monthly installments of $2,250, with all remaining principal and interest due on or before November 21, 1985; that in the event of Watts' failure to make payments when due, the entire balance of principal and interest would become due and payable immediately; that the Bank was the owner and holder of the note; and that the Bank made demand upon the defendant to pay all principal and interest due under the note, but Watts refused and neglected to make any payments. The note, a copy of which was attached to the petition, provided: "This Note is secured by a certain Mortgage...." In her answer, Watts generally denied the Bank's allegations and raised the following affirmative defenses: The case was submitted to the court on a joint stipulation of facts with exhibits. Where the parties stipulate to all the facts at trial, the Supreme Court reviews the case as if trying it originally in order to determine whether the facts warranted the judgment. Dugdale of Nebraska v. First State Bank, 227 Neb. 729, 420 N.W.2d 273 (1988). The record shows that on November 21, 1980, Watts and the Bank entered into a term loan agreement wherein the Bank agreed to lend Watts $160,000 for a period of 5 years or to the date of default. The loan was evidenced by the promissory note at issue here. To secure the indebtedness, Watts also executed a mortgage on the following-described real estate: On December 29, 1981, Watts sold the "North 121 Feet of Lots 1 and 2, Block 175, City of Omaha, (also known as 1101 Jackson Street, Omaha, Nebraska)" to Jay B. Smiley for $249,312. This sale was made subject to the Bank's first mortgage on the *540 property, and Smiley agreed to pay for the property as follows: Smiley was a director of the Bank at the time of the sale, but this transfer was to Smiley individually. The Bank did not orally or in writing expressly authorize the sale, nor did it expressly agree to substitute Smiley for Watts as the debtor on Watts' note. Watts believed, however, that the Bank knew of and had no objection to the sale. The Bank made Smiley a loan of $200,000 on May 20, 1982, taking a second mortgage on the real estate as security for the loan. Smiley's "Single Payment Note and Security Agreement" provided: (Emphasis supplied.) Smiley executed the mortgage on June 4, 1982. Smiley subsequently defaulted on his note. The Bank brought a foreclosure action against him in the district court for Douglas County on January 21, 1983, and received a judgment on November 26, 1984, in the amount of $283,096.31 plus interest. The decree provided that the mortgage held by the Bank, as recorded, constituted a lien on the following real estate: (Emphasis supplied.) The property was sold to the Bank at a public sheriff's sale on June 25, 1985, for $189,000. The sale was confirmed by the district court on July 31, 1985. Watts was not a party to the foreclosure action and had no knowledge of the action, no notice of the sheriff's sale, and no notice of any hearing to confirm the sale. The Bank's records did not reflect that Watts was given written notice of the foreclosure action or the sheriff's sale. Appraisals attached as exhibits to the joint stipulation estimate the market value of the property foreclosed to have been $200,000 as of November 15, 1980; $490,000 as of June 1, 1982; $375,800 as of June 6, 1984; $370,000 as of December 10, 1985; and $370,000 as of February 2, 1987. The district court entered judgment for Watts, denying the Bank recovery on Watts' note, finding: The Bank has appealed, contending the district court erred (1) in determining that the mortgage securing Watts' note merged with the fee title to the real estate obtained by the Bank in connection with the foreclosure of Smiley's second mortgage on the property; (2) in finding that Watts had a surety's interest in the real estate foreclosed by the Bank; (3) in determining that Watts was discharged from her debt because the appraised value of the real estate at the time of the foreclosure sale exceeded the total amount of the Bank's successful foreclosure bid and the debt evidenced by Watts' note; (4) in finding that the Bank could not recover on Watts' note because it foreclosed on Smiley's second mortgage on the real estate at a time when the property was fully encumbered by Watts' first mortgage; and (5) in finding that the Bank could not separately foreclose the second mortgage and purchase the real estate at a sheriff's sale, subject to Watts' first mortgage, without having given notice to Watts. The question presented in this appeal may be stated as follows: Where a mortgagee holds both first and second mortgages, what is the effect of the mortgagee's purchase of the property at the foreclosure sale of the junior mortgage on its rights as to the debt secured by the senior mortgage? The general rule is that if the holder of both a junior and senior mortgage forecloses the junior and buys at the foreclosure sale, in the absence of an agreement to the contrary, the mortgagor's personal liability for the debt secured by the first mortgage is extinguished. The reason given is that upon a foreclosure sale under a junior mortgage the purchase is subject to the payment of the prior lien with the result that the mortgagor has an equitable right to have the land pay the mortgage before his personal liability is called upon, and the purchaser, if he owns or acquires the mortgage, will not be permitted to enforce it against the mortgagor personally. The second mortgagee purchaser is presumed to have made allowance for the prior lien in making his bid. The following cases illustrate the application of the rule. In Wright v. Anderson, 62 S.D. 444, 253 N.W. 484 (1934), the defendant Anderson borrowed $17,000 from Mitchell Trust Company and with his wife executed seventeen $1,000 promissory notes secured by a first mortgage on several parcels of real estate. J.H. Wright subsequently loaned Anderson $23,000 and received a promissory note secured by a second mortgage on the land previously mortgaged and 640 acres of other real estate. The second mortgage provided that it was subject to the $17,000 mortgage given to Mitchell Trust Company. Mitchell Trust Company then sold and assigned to J.H. Wright the seventeen $1,000 notes and the mortgage securing the notes. At the time of his death, J.H. Wright was the owner of the seventeen $1,000 notes, the $23,000 note, and the two mortgages securing the notes. His executrix, Rosa Wright, brought an action to foreclose the $23,000 second mortgage, secured a judgment, and purchased the property at a sheriff's sale for $36,190 (the amount then due on the $23,000 mortgage). Rosa Wright then sought a personal judgment on the seventeen $1,000 notes. The defendants claimed, and the trial court found, that Rosa Wright's acquisition of the property upon foreclosure of the second mortgage satisfied the indebtedness secured by the first mortgage and that the defendants were no longer liable thereon. On appeal, the Supreme Court of South Dakota determined that the defendants' personal liability on the notes had been extinguished as a result of the foreclosure of the second mortgage. (Emphasis supplied.) Wright v. Anderson, supra, 62 S.D. at 449-50, 253 N.W. at 487. Although Wright argued that in making her bid she did not, in fact, take into consideration or allow for the amount of the first mortgage, the court stated: Id. at 452, 253 N.W. at 488. In Retirement Bd v. Ren-Cen Club, 145 Mich.App. 318, 377 N.W.2d 432 (1985), leave to appeal denied 425 Mich. 875, 388 N.W.2d 680 (1986), the plaintiff, board of trustees of the general retirement system of the city of Detroit, loaned the defendant $1.1 million in June 1978 and received a promissory note for that amount secured by a first mortgage on real estate located in Detroit. In August 1980, the plaintiff loaned the defendant $500,000, receiving a promissory note for that amount secured by a second mortgage on the same property. The defendant defaulted on both loans. The plaintiff foreclosed its second mortgage, purchased the property at the foreclosure sale for the amount owed on the second note, took possession of the property, and commenced an action to recover the amount owed on the first note. The fair market value of the property was more than $3 million on the date of the foreclosure sale. The trial court granted the plaintiff's motion for summary judgment, and the defendant appealed. In reversing the judgment of the trial court, the Michigan Court of Appeals held that the debt secured by the first mortgage was discharged when the plaintiff acquired the mortgaged property *543 at the foreclosure sale on the second mortgage: Retirement Bd v. Ren-Cen Club, supra, 145 Mich.App. at 325-26, 377 N.W.2d at 436. See, also, Zastrow v. Knight, 56 S.D. 554, 229 N.W. 925 (1930); Weir &amp; Russell Lbr. Co. v. Kempf, 234 Iowa 450, 12 N.W.2d 857 (1944); McDonald v. Magirl, 97 Iowa 677, 66 N.W. 904 (1896); Belleville Savings Bank v. Reis et al., 136 Ill. 242, 26 N.E. 646 (1891); Maulding v. Sims, 213 Ill.App. 473 (1919); Ruther v. Thomas, 43 Colo.App. 435, 604 P.2d 703 (1979); Baxter v. Redevco, Inc., 279 Or. 117, 566 P.2d 501 (1977). In the present case, Smiley purchased from Watts a portion of the mortgaged property, subject to the Bank's first mortgage, and did not assume responsibility for the payment of Watts' debt. The terms of the sale to Smiley reflected the outstanding first mortgage on the property. The Bank subsequently purchased the property at a foreclosure sale on June 25, 1985, for $189,000. The Bank itself was the holder of the first mortgage and, under Wright v. Anderson, 62 S.D. 444, 253 N.W. 484 (1934), is presumed to have bid the value of the property less the amount of the prior encumbrance. Furthermore, as the trial court noted, "The appraisal of June 7 [sic], 1984 ... valued the land at $375,000. The appraisal of December 10, 1985 ... placed the value of the land at $370,000. The Plaintiff's reduced payment for the land obviously reflects the Defendant's interest of at least $157,117.00." The foreclosure decree itself specifically stated that the second mortgage held by the Bank constituted a lien on the real estate subject to any prior, valid mortgages or encumbrances of record. The land, therefore, was the primary fund for the payment of Watts' mortgage debt, and Watts had the right to require that the land be exhausted in the payment of her debt. The trial court found that the value of the land at the time of the foreclosure sale was in excess of Watts' debt to the bank, and Watts' personal liability on her note has been extinguished. The judgment of the district court is affirmed. AFFIRMED. CAPORALE, J., not participating.