Opinion ID: 2373111
Heading Depth: 1
Heading Rank: 1

Heading: Intentions of the Parties

Text: Because wrap-around mortgage transactions exist without the benefit of legal construction and interpretation, parties entering into such agreements do so at a considerable risk. [1] See Comment, 21 U.C.L.A.L. Rev. at 1531 (1974). Due to the dearth of authority in this area and the limited applicability of the few available authorities, [2] I would apply general rules of construction in this case to determine the correct calculation of the foreclosed indebtedness and the appropriate credit bid. Any attempt to ascertain the obligations of the parties should begin with an examination of the terms of the wrap-around note and deed of trust. Such an examination should be made in light of the nature of the wrap-around mortgage transaction itself. These instruments were contemporaneously executed and therefore must be read together. Bennett v. State National Bank of Odessa, 623 S.W.2d 719 (Tex.Civ.App.Houston [1st Dist.] 1981, writ ref'd n.r.e.). Generally, in the absence of ambiguity, the agreement contained in a note and deed of trust must be strictly construed and express provisions cannot be altered by equitable considerations. Chapa v. Herbster, 653 S.W.2d 594, 602 (Tex.App.Tyler 1983, no writ); Lockwood v. Lisby, 476 S.W.2d 871 (Tex.Civ.App.Fort Worth 1972, writ ref'd n.r.e.). I would therefore employ general rules of construction in determining the intent of the parties, and thereby clarify their corresponding rights and liabilities. Petitioner, EVA, contends that from the clear terms of the note, Consolidated was obligated to pay the full wrap-around indebtedness of approximately $6.2 million. The note refers to the original principal balance of $4.7 million plus accrued interest as the indebtedness secured by the deed of trust. The deed of trust likewise provides that, in the event of default and foreclosure, the trustee should apply the proceeds to the balance of the indebtedness. Again, the principal sum of $4.7 million plus applicable interest is specifically referenced as the indebtedness. Unless these documents contain additional specific language illustrating that the parties intended a different result, the clear terms of the Note and Deed of Trust support the contentions advanced by EVA. It is well documented among the scarce authorities addressing this area of mortgage financing that the deed of trust should expressly provide the proper procedures for declaring a default and conducting the trustee's sale. Armsey v. Channel Associates, Inc., 184 Cal.App.3d 833, 229 Cal.Rptr. 509 (Cal.Ct.App.1986); J.M. Realty Investment Corp. v. Stern, 296 So.2d 588 (Fla.Dist.Ct.App.1974). In fact, recent commentaries contain examples of express language that would avoid the quandary facing the parties in this case. [3] As a fundamental component of the complex structure of a wrap-around note, the issue of primary liability becomes a factor in determining the rights of the parties upon foreclosure of the deed of trust. Although the wrap-around note includes the principal amount of the underlying senior notes, the maker of the wrap-around note (the purchaser) usually does not assume primary liability for this underlying indebtedness. The wrap-around note holder (the seller) is obligated to pay the underlying indebtedness, for which the seller is primarily liable, from the payments made to him by the purchaser. At this point the purchaser owns the property, encumbered by the wrap-around deed of trust and the senior lien deeds of trust (upon which the purchaser is not primarily liable). See generally M. Baggett, Texas Foreclosure § 2.87C (1988 Supp.). The issue of primary liability is also significant in determining the outcome of the companion case of Lee v. Key West Towers, Inc., 783 S.W.2d 586 (Tex.1989). However, it is of paramount importance in this case to determine the maximum credit allowed upon foreclosure of an inferior wrap-around mortgage. I would hold that, where the purchaser does not assume primary liability for the wrapped indebtedness, the seller remains liable for the underlying senior debt even after foreclosure of the inferior lien. After foreclosure of a wrap-around mortgage, the property remains encumbered by the prior superior liens. When a lien is foreclosed, all inferior liens are thereby extinguished. However, any senior encumbrances remain valid and enforceable against the property. If a junior lien is foreclosed, but senior liens remain outstanding, the purchaser at the trustee's sale should tailor his or her bid to accommodate the balance due on the senior lien debt. Accordingly, the purchaser would calculate his bid by subtracting the amount owed on the senior debt from the fair market value of the property. See Baggett, Texas Foreclosure § 2.63 (1984). This practice is consistent with the apparent intentions of the parties as expressed in the subject to language and in the wrap-around mortgagee's personal liability on the underlying debt. The majority holds that the full balance was the amount foreclosed upon and thus a deficiency remains. However, in this case, such an interpretation is negated by the express terms of the deed of trust. The power of sale in the deed of trust restricts the trustee's power to sell the property. The trustee is only authorized to foreclose on the property to discharge the fifth lien. There is no express authorization to pay off or otherwise affect the prior senior liens. The sale must be conducted in strict conformity with the power of sale provisions. Houston First American Savings v. Musick, 650 S.W.2d 764, 768 (Tex.1983). In J.M. Realty Investment Corp. v. Stern, 296 So.2d 588 (Fla. Dist.Ct.App.1974), the Florida District Court of Appeals also concluded that a more equitable result was reached by allowing foreclosure of the total wrapped indebtedness and requiring that the foreclosing mortgagee apply the proceeds to the underlying debt. 296 So.2d at 589. However, in adopting such a result the court clearly departs from settled case law as well as the express terms of the deed of trust. The majority's outstanding balance approach results in an unconscionable windfall to the wrap-around mortgagee, and a corresponding detriment to the wrap-around mortgagor, under any real world foreclosure scenario. For example, if EVA had bid a low amount at the foreclosure sale, say $50,000, then the deficiency owing to it by Consolidated would be $6,156,952. This bid would be credited against EVA's debt, and EVA would own the property subject to underlying debts of $3,994,266. In other words, EVA would own the property, subject to the same underlying debt with which it was burdened at the time of the wrap-around transaction, but in addition EVA would have a deficiency judgment against Consolidated. This would be a huge windfall for EVA. Because I believe that the court's interpretation violates the express terms of the deed of trust, and the intentions of the parties, I dissent. SPEARS and RAY, JJ., join in this dissent.