Opinion ID: 369080
Heading Depth: 1
Heading Rank: 3

Heading: strict foreclosure

Text: 12 Appellant's attack on Vermont's strict foreclosure statute is substantive, not procedural. In effect, the laws permit a mortgagee to receive any surplusage remaining after the proceeds from the mortgaged land have been applied in payment of the mortgagee's debt and costs as found in the foreclosure decree. See note 9 Supra. This form of strict foreclosure has been a part of Vermont law from Vermont's earliest days and until 1973 no statute 16 has permitted foreclosure by judicial sale. See H. Harmon, Vermont Court Procedure § 173, at 221 (1912). Yet interestingly, the state Attorney General appears to concede that strict foreclosure permits the inequitable enrichment of the mortgagee; indeed, the Attorney General reasons that insofar as the mortgagee still has a cause of action under the note to sue the borrower/mortgagor if the property is worth less than the debt, there would seem to be a clear violation of equal protection rights because the borrower has no right to seek a refund of overage that the mortgagee receives on the sale. And here in fact the mortgagee did ultimately receive an amount several thousand dollars in excess of the mortgage debt. 13 However, absent any suggestion that the foreclosure laws operate to burden a suspect group or fundamental interest, the appropriate standard for analyzing the foreclosure laws under the Equal Protection Clause is whether they are rationally related to a conceivable legitimate state interest. City of New Orleans v. Dukes, 427 U.S. 297, 303-04, 96 S.Ct. 2513, 49 L.Ed.2d 511 (1976); See Vance v. Bradley, 440 U.S. 93, 97, 99 S.Ct. 939, 943, 59 L.Ed.2d 171 (U.S.1979) (we will not overturn such a statute unless the varying treatment of different groups or persons is so unrelated to the achievement of any combination of legitimate purposes that we can only conclude that the legislature's actions were irrational). In an economic matter such as this, we owe an extraordinary deference to state objectives, almost the equivalent of a strong presumption of constitutionality, and we must uphold any classification based upon a state of facts that reasonably can be conceived to constitute a distinction, or difference in state policy . . . . Allied Stores v. Bowers, 358 U.S. 522, 530, 79 S.Ct. 437, 443, 3 L.Ed.2d 480 (1959); See Image Carrier Corp. v. Beame, 567 F.2d 1197, 1202-03 (2d Cir. 1977), Cert. denied, 440 U.S. 979, 99 S.Ct. 1785, 60 L.Ed.2d 239 (U.S.1979). The substantive due process test similarly, is whether the laws are rationally related to a legitimate state interest, Williamson v. Lee Optical Co., 348 U.S. 483, 487-88, 75 S.Ct. 461, 99 L.Ed. 563 (1955), though the focus of substantive due process analysis is not whether the State has treated similarly situated classes differently but whether its interest in burdening a Single class outweighs the due process interests of that class. See Note, Equal Protection: A Closer Look at Closer Scrutiny, 76 Mich.L.Rev. 771, 831-37 (1978). 14 Applying these tests, we hold the Vermont mortgage foreclosure laws constitutional. In the first place strict foreclosure has a long history in the state. At the time of the American Revolution strict foreclosure was the only method of foreclosure recognized by the English chancellors. 17 In the early days a mortgage would be foreclosed by a bill in equity drawn with all the circumlocution of the English practice so vividly described in Dickens' Bleak House. In Vt. Acts 1852 No. 12 the Vermont legislature enacted forms for petition and decree to simplify the proceedings, and until Vermont adopted procedural rules similar to those of the federal rules in 1959 those proceedings followed quite closely a rule of court, Chancery Rule 38, later Rule 39, regulating the time for redemption. See generally H. Harmon, Supra. The procedure has been even further simplified by the unification of law and equity in Vermont when Vermont adopted the federal rules. See Vt.R.Civ.P. 80.1 and notes 3 and 4 Supra. 15 Historical basis does not, of course, alone establish rational relationship, but it does indicate that the people of the state of Vermont have managed fairly well to conduct their commercial affairs despite the allegations of unfairness that can be directed against strict foreclosure. Property is bought and sold, and mortgages are given and generally paid, if sometimes foreclosed. It has always been open to the courts, as matters of equity, to extend a time for redemption in the event that a property seemed to be more valuable than the debt which it secured, See Burlington Building & Loan Association v. Cummings, 112 Vt. 122, 124-25, 22 A.2d 377, 378-79 (1941), or to enlarge or reopen the right of redemption if the mortgagee accepts payment outside the terms of the redemption order, Trudeau v. Lussier, 123 Vt. 358, 365-66, 189 A.2d 529, 535 (1963). Creditors and debtors have worked out numerous accommodations, sometimes without the aid of the courts, sometimes by virtue of court mandate, with little or no apparent dissatisfaction and certainly no challenge on this basis over the years. 16 But what is that rational relationship? One possible purpose of strict foreclosure is to make it easier for banks or other creditors to lend by giving them a speculative interest in the property, for the bank realizes that it may retain the excess if the property's value happens to exceed the debt. Another purpose might be to compensate the bank for its administrative expense, its employees' time, and its general overhead for any effort involved in a foreclosure suit and subsequent resale. A third possibility is that, in an implicit quid pro quo, the legislature has granted the banks this speculative interest in return for requiring the banks to lend mortgage money at lower interest rates, 18 and to permit prepayment without penalty. 19 Of course, although the favorable interest rates and the nonpenalty provision benefit those who are able to obtain loans, these provisions may also operate as a brake on the volume of mortgage lending in Vermont; but strict foreclosure may mitigate somewhat that braking effect and thus may itself indirectly benefit the class of potential mortgagors. 17 Moreover, perhaps an even more important element of the implicit quid pro quo is that strict foreclosure, as interpreted in Vermont, imposes on banks a substantial delay before they may recover some value for uncollectible debts. To the typical six-month period for redemption 20 one must add two periods of time from default in payments to the entry of the initial foreclosure decree and from the final decree to the execution of the writ of possession. These may be lengthy, especially in counties, E. g., Addison, whose courts have widely spaced semi-annual terms and long periods of recess or whose courts, E. g., Chittenden, have crowded dockets. These delays certainly diminish the profitability of mortgage lending in Vermont and may in the minds of the legislature help justify an occasional windfall benefit to the banks. In the instant case, for example, at least fourteen months elapsed from the time after default that the Bank notified appellant it intended to foreclosure until it actually obtained possession. 18 Thus, with respect to the distinction between the bank's right to a deficiency and the mortgagor's right to recover a surfeit, the laws do not operate unfairly, in either the equal protection 21 or substantive due process sense. But one might object that the laws create a different kind of unfairness in their differential treatment of mortgagors because they burden only those mortgagors whose property happens to have a value in excess of the outstanding debt. The bank's administrative expenses and losses from uncollectible debts should, one might argue, be collected not from these unfortunate mortgagors, but from the class of mortgagors (or potential mortgagors) generally, in the form of higher interest payments or lesser availability of loans. 22 But this objection is unpersuasive. The legislature may reasonably have concluded that strict foreclosure laws equitably distribute the commercial costs of mortgages because every mortgagor, when he executes a mortgage, is equally subject to the risk that his property's value will exceed the portion of his debt that he is unable to pay. The State's failure to insure against the unequal actual Incidence of this risk by permitting banks to absorb the risk in their interest rates does not amount to a violation of equal protection. 19 Moreover, to a significant degree mortgagors in the situation of appellant who are burdened by the strict foreclosure laws have in a very real sense brought the misfortune upon themselves because nothing in the law and so far as we can see nothing in fact prevents them from selling the property while the foreclosure is pending; if the property really has an excess value it can be realized by the mortgagor on such a sale. To be sure, conceivably the pendency of a foreclosure proceeding might in some cases operate so as to depress the market for the mortgaged real estate though it is a little difficult to see just how or why unless the mortgagee is the only available lending institution in the particular area. But in this day of several state-wide lending institutions, with easy telephonic communications and ready transportation available, it is difficult to see save in the remotest circumstances how this could be the case. At least one can readily view the legislature as taking the position that to protect those few mortgagors who might be thus adversely affected would not be more desirable than, say, to make mortgage money more readily available through the strict foreclosure incentive. 20 And that is the nub of it. In the ordinary situation a mortgagor will have six months from the entry of a decree (which itself may occur some considerable time after default in payments) within which he can sell his property, and there is nothing that a bank can do to forestall any such sale. Vermont land generally is a marketable, now a highly marketable, commodity. Numerous banks, state and national, as well as savings and loan associations are available for borrowing purposes. Moreover, appellant also had the options of attempting to refinance his loan or of seeking an extension of the redemption period. In light of these several alternatives, the legislature may well suppose that it will only be the extraordinarily recalcitrant debtor who will be injured by strict foreclosure. 21 Vermont has only recently enacted a statute which permits a power of sale provision to be placed in the contract by negotiation and to be enforced under judicial supervision. See note 2 Supra. And perhaps the Vermont legislature will follow the suggestion in the Vermont Attorney General's brief that a mortgagor be permitted to move for a judicial sale even if his mortgage deed does not contain a power of sale provision. This is a matter for the Vermont legislature, however, not for us. We agree with the appellees Bank and Young that the Vermont strict foreclosure law is constitutional under the rational relationship tests above stated. 22