Opinion ID: 1721223
Heading Depth: 2
Heading Rank: 3

Heading: The Rights of Construction Lenders as Purchasers at Power of Sale Foreclosure Vs. The Materialmen's Liens

Text: Notwithstanding the foregoing, the construction lenders assert a further thesis in support of reversal. They argue that the power of sale foreclosures in December of 1981 operated so as to convey clear title to the purchasers at the foreclosure sale, none other than the construction lender/banks themselves. The lien of the construction lienors/materialmen, together with the priority recognized under the reasonable diligence rule discussed in the preceding section, would attach to the proceeds of the foreclosure sale. The foreclosure itself, however, operated to extinguish the perfected construction liens in the property itself and to transfer those liens to the proceeds of the sales. This argument must be considered in the context of the nature and theoretical under-girdings of the non-judicial power of sale foreclosure. Mississippi was one of the first states to adopt non-judicial foreclosure of mortgages and deeds of trust on real property. See Sims v. Hundly, 3 Miss. (2 How.) 896, 898-899 (1838). This type of foreclosure has now become dominant throughout the United States. See Comment, Due Process Problems of Mississippi Power of Sale Foreclosure, 47 Miss.L.J. 67, 69 (1976). In this state non-judicial foreclosures are authorized by legislative enactment. Miss. Code Ann. (1972) § 89-1-55. Under our procedure the property is conveyed by the grantor (trustor) to a trustee, subject only to the requirements that the grantor/debtor perform the conditions and provisions of the deed of trust. See Miss. Code Ann. (1972) § 89-1-43. Once properly filed for record, the deed of trust is entitled to priority according to date of filing. Upon default by debtor in performance of the conditions of the trust, the trustee is empowered to foreclose. If the statutory requirements are observed, sale under the power is a perfect foreclosure. The trustee's deed is a conveyance absolute as though the trustee held fee simple title. It cuts off the equity of redemption and any other rights in and to the property (all of which are transferred to the foreclosure sale proceeds), with the sole exception of rights perfected prior to the filing of the deed of trust under which the foreclosure sale is held. See Hart v. Gardner, 81 Miss. 650, 33 So. 497 (1902). As he executes the trustee's deed, the trustee in fact and in law possesses the same power to convey as any other person seized of title to real property. If one or more of the substantive conditions of the deed of trust have been breached substantially by the debtor/grantor, and if the trustee has complied with all of the procedural requisites (imposed by statute or by the trust deed itself), the foreclosing trustee's power to convey is as though he holds title by deed. The priority of his deed is determined by the date on which the deed of trust was filed for record. By trustee's deed he has the exact same power to convey free and clear of junior liens or interest as though he held a deed absolute filed for record the day the deed of trust was recorded. [4] The theory of a power of sale foreclosure just stated has been accepted wherever non-judicial foreclosures are authorized by procedures similar to those found in our statutes. For example, the California case of Metropolis Trust & Savings Bank v. Barnet, 165 Cal. 449, 132 P. 833 (1913) held that the purchaser from a trustee acquired absolute title to real property even though mechanics' lienors had suits pending to foreclose their liens at the time of the power of sale foreclosure. Tolleson v. Nobles, 152 S.W. 850 (Tex.Civ.App. 1913) is to like effect. Even a federal tax lien may be extinguished by a power of sale foreclosure in Mississippi. United States v. Boyd, 246 F.2d 477 (5th Cir.1957). In the Boyd case the federal tax lien was junior in right to the first mortgage lien. Citing Sims v. Hundly, supra; Dibrell v. Carlisle, 48 Miss. (6 Morris) 691 (1873); and Hubbard v. Massey, 192 Miss. 95, 4 So.2d 230 (1941), the Court of Appeals correctly stated the Mississippi law as follows: The result is that when a mortgage has been validly foreclosed by a non-judicial sale under a power, it is the consequence of such prior lien and the right of enforcement under it which destroys the junior encumbrance whether it be a private or federal tax lien. 246 F.2d at 483-484. We return to the facts of this case. We note that at the time of the two foreclosure sales, the two materialmen's liens held by Arick and Wickes, respectively, had been perfected. The priority of those liens over the earlier filed deeds of trust of Bank of Mississippi and Peoples Bank, however, had not been finally established. Accordingly, under the general rule cited above, it might be persuasively argued that the power of sale foreclosures cut off all rights of Arick and Wickes in and to Tract Nos. I and II. Had the property been sold to purchasers who paid fair value at the foreclosure sales, the case might indeed be compelling. We are concerned here, however, with foreclosure sales prices which are shockingly inadequate. The evidence suggests that the value of the improvements on Tract No. I at the time of trial was $30,000, not including the approximately $8,000 value of the lot. Bank of Mississippi bid in Tract No. I for the paltry sum of $1,000. The situation with Tract No. II is almost as egregious. The combined value of improvements ($13,500) and the lot ($8,000) is approximately $21,500. Peoples Bank purchased the lot at foreclosure for a like sum of $1,000. If construction lenders such as these want the benefit of a perfect foreclosure under power of sale, including the power of the trustee to convey fee simple absolute title to the subject property, they must make reasonable, good faith (albeit conservative) bids at the foreclosure sale. This should not be hard to do, for our law recognizes that a foreclosure sale may be set aside because of an inadequate sales price only where the price is so low as to shock the conscience of the court or to amount to fraud. Smith v. General Investments, Inc., 246 Miss. 765, 769, 150 So.2d 862, 864 (1963); Central Financial Services, Inc. v. Spears, 425 So.2d 403 (Miss. 1983). Though arguably the mother of much mischief, this rule is well entrenched and we are not disposed to disturb it here. We have here a situation, however, where Bank of Mississippi has successfully bid at foreclosure an amount equal to only 2.63 percent of the estimated fair market value of the subject property. Peoples Bank bid for Tract No. II an amount equal to only 4.65 percent of fair market value. Were this an action to set aside the foreclosure sales for lack of an adequate sales price, it would be hard to imagine on what basis the two banks might justify their conduct. [5] Therefore, as purchasers at foreclosure with notice and for wholly inadequate considerations, the rights acquired by the two bank/construction lenders in and to Tracts Nos. I and II must, in equity and good conscience, be rendered subordinate to the claims of Arick and Wickes. Those prior claims are measured as follows: Arick and Wickes must first exhaust the proceeds of sale (presumably still held by the trustee), according to their priorities vis-a-vis each other. (See Section VI below). To the extent either is still unpaid, it then has a perfected lien against Tract No. I or Tract No. 2, as the case may be. These liens are superior to the rights of the construction lenders in their capacity as holder of trustees' deeds.
Though it contains language arguably in conflict with a part of what we have said above, Guaranty Mortgage Co. of Nashville v. Seitz, 367 So.2d 438 (Miss. 1979) also compels the result we reach here. [6] In Seitz the Court was faced with a legally analogous situation. There the construction lender conducted a power of sale foreclosure after certain materialmen had filed notice of construction liens and one day after they filed suit to enforce those construction liens plus a lis pendens notice. The Seitz Court held that, when Guaranty Mortgage conducted its power of sale foreclosure and purchased the property at the trustee's sale, it took title subject to the contingency that the materialmen's liens were valid and enforceable. The Court reasoned that, if the holder of the deed of trust was allowed in this way to extinguish the liens of materialmen by power of sale foreclosures, priority rights granted to the materialmen under the statutory scheme and our prior case law would be effectively destroyed. Construction lenders here argue that Seitz is not controlling. They point to the fact that in Seitz the materialmen had both filed notice of construction lien and filed suit to foreclose on the liens, while here only notice of construction lien has been filed. Surely this is a legally insignificant distinction. For as we have held above, Section 85-7-131 makes it clear beyond peradventure that the liens can be perfected, and their priority established, by the mere filing of the notice of construction lien, which here was done. Filing suit is a step toward enforcement (foreclosure, if you will) of the lien. In no way is it a prerequisite to perfection or priority. Seitz suggests that the trustee at the power of sale foreclosure had no power to convey the subject property out from under the perfected liens of the materialmen, even to third party purchasers without actual notice of the existence of the liens and who pays a fair consideration. The underlying premise here is that a mortgagee's rush to foreclosure should not be allowed to defeat otherwise enforceable rights. To the extent that Seitz prevented such from happening, it is sound. Absent circumstances such as the shockingly inadequate foreclosure sales price here, there is ordinarily no reason why the materialmen's liens should remain impressed against the foreclosed property. [7] Those liens may be transferred to the sale proceeds. They would be entitled to such priority as the facts require, as per Section IV(B) above. The underlying goal of Seitz is thus achieved. Seen in this light, Seitz should be read to provide that the conveyance via trustee's deed following foreclosure is made subject to the materialman's lien only where the mortgagee bids in the property at foreclosure for a price so shockingly low as would under established case law render it voidable, see Central Financial Service, Inc. v. Spears, 425 So.2d 403 (Miss. 1983), or where the mortgagee has been guilty of other similarly inequitable conduct. This is all that is necessary to avoid the prejudice to the rights of materialmen and other construction lienors which was the underlying aim of Seitz. In this case there is little equity on the side of the two construction lender banks. Each had actual notice of the claims of Arick and Wickes before it became a purchaser at the foreclosure sale. Neither bank can assert with any credibility that it is a bona fide purchaser for value. Had either bank at foreclosure decided to pay the fair market value of the properties, the equities might be different. For example, if Bank of Mississippi had in fact bid and paid to the trustee at the foreclosure sale a sum anywhere near the $38,000 estimated fair market value, we might have a different situation. Then there would be no equity in a holding to the effect that the perfected liens and security interests of the materialmen, etc. remained affixed to the foreclosed property. Those claims would, under the theory articulated above, be transferred to the sale proceeds. With priorities to be determined under the rule of First National Bank of Greenville v. Virden, supra, and progeny, Arick and Wickes would get their money. What we actually have before us, however, is a horse of a different color. Bank of Mississippi, for example, purported to buy in an uncompleted residence having a fair market value of $38,000 for the princely sum of $1,000. Peoples Bank was almost as bad. To allow these banks to thus defeat the perfected liens of the materialmen amounts to little short of highway robbery, which this Court is not about to sanction. In more formal legal terminology, on these facts the two banks are estopped to assert any rights in and to Tracts Nos. I, II, and III in any way having priority over other claimants.