Opinion ID: 1719022
Heading Depth: 1
Heading Rank: 1

Heading: The fraud requirement begins to fade.

Text: ¶ 63. The demise of the fraud requirement began with the 1907 case of Weyburn v. Watkins, [7] wherein this Court casually mentioned in dictum that the sale of land. . . will not be set aside for mere inadequacy of price, unless the inadequacy is such as to shock the conscience. Id. at 735, 44 So. 145. For reasons not apparent and unexplained, the Weyburn Court omitted any reference to fraud. Here lies an excellent example of how the slightest misstatement or omission, even in dictum, can quickly lead to unwarranted changes in the law. Prior to Weyburn, an inadequate price which shocked the Court's conscience was accepted as relevant evidence of fraud, but it had been insufficient, in and of itself, to set aside a foreclosure. [8] With Weyburn's obiter dictum unaided by the context provided in previous cases which clearly related the inadequate price to fraudlater Courts and less careful justices would be influenced to hold that an inadequate price which shocks the conscience was a sufficient ground to set aside a foreclosure, with no mention of the necessary nexus to fraud. Indeed, Weyburn's omission of this minute detail was to prove important in this Court's gradual emasculation of the foreclosure statutes. In cases following Weyburn, this Court continued to employ its newly conceived shock-the-conscience test with vigor, and the previously-required fraud element simply disappeared. ¶ 64. Interestingly, the price the creditor paid at the foreclosure sale in Weyburn apparently did not shock the Court's conscience, because the sale was confirmed. Nevertheless, creditors had been placed on notice that, in Mississippi, shocking this Court's conscience was not allowed. The equitable requirement. ¶ 65. In 1979, this Court decided Mississippi Valley Title Insurance Company v. Horne Construction, 372 So.2d 1270, 1272 (Miss.1979). Rarely does a case so profoundly change the law, without citation to a single case or statute. [9] ¶ 66. After instituting foreclosure of a deed of trust securing a construction loan, the mortgagee, First Memphis Realty Trust (FMRT), purchased the property at the foreclosure sale. Finding that the sale price did not cover the entire debt owed, FMRT petitioned the chancery court for a deficiency judgment. The mortgagor, Roell Development Corporation, challenged the deficiency, arguing that FMRT was partly responsible for the default because it had not properly funded the construction loan. ¶ 67. The chancellor held that FMRT was justified in instituting the foreclosure, and the price it paid for the property at the foreclosure sale was not unreasonable. Id. at 1271. Nevertheless, the chancellor denied FMRT's application for a default judgment because there seems to be some element of high-handedness in the moving to protect their position (FMRT) which left the relative positions of the two parties, Roell and FMRT, on nothing like an equal basis. Id. In explaining the high-handedness, the chancellor stated: Roell had good reason to believe that FMRT was going to pay the additional $500,000 necessary to complete the project and while [Roell] violated the written agreement between the parties by virtue of the transfer of title to RODA, it seems to the Court to be something which could have been waived by FMRT but did not have to be. Under the circumstances, it would have been extremely difficult for Roell to have found alternative financing in time to prevent the foreclosure. Id. (emphasis added). Basically, the chancellor frowned upon FMRT's failure to waive its perfectly legal right under its written contract, and worried about Roell's ability to find additional needed financing. ¶ 68. On appeal, the Mississippi Valley Title majority stated simply that the finding of the chancellor will not be overturned unless this Court finds him to be manifestly wrong. Id. at 1272. Thus, like the chancellor, the Mississippi Valley Title majority seemed quite comfortable with overlooking Roell's double breach of the contract, [10] and FMRT's statutory right to a deficiency judgment. The Court upheld the foreclosure sale, but nonetheless denied FMRT its deficiency judgment. This statutorily unsupported result was justified by the Mississippi Valley Title majority by adopting the following language from the chancellor's opinion: While we [11] cannot say the price paid at the foreclosure was too low, nevertheless, it was a price set by FMRT, and there is evidence in the record indicating that the property is worth more than the amount owed altogether, and only a short time before foreclosure, FMRT was willing to put $500,000 more into the property. Under these circumstances, it does not seem equitable for FMRT to have been allowed to move on the foreclosure basis, establish a price which left them entitled to, on the face of it, a substantial deficiency judgment and reap whatever benefits might come from that as well as owning the whole property. Therefore, the Court finds that FMRT is not entitled to a deficiency judgment or cost of collection against Roell. Id. at 1271 (emphasis added). In affirming the chancellor, this Court also cited with approval the chancellor's finding that the `high-handedness' of FMRT left the parties on `nothing like an equal basis.' Id. at 1273. ¶ 69. At first reading, it is difficult to fully appreciate Mississippi Valley's departure from established law. Prior to this amazing decision, creditors who didn't commit fraud, didn't shock the Court's conscience, and observed all statutory requirements in conducting foreclosure sales, were virtually assured that their contractual and statutory right to a deficiency judgment would be upheld by this Court. ¶ 70. With Mississippi Valley, however, mortgagees had new requirements to meet and obligations to fulfill. They must not be high-handed. They must, in some cases, waive their rights. And above all, they must satisfy this Court, not only that they have the legal right to a deficiency, but also that a deficiency judgment would be equitable. ¶ 71. It is important to emphasize that the Mississippi Valley Court accomplished this significant change in the law without a single citation, anywhere in the entire case, of a case or statute from Mississippi (or any other state for that matter). The only citation in the entire opinion was the following paragraph from a legal encyclopedia: The mortgagee's right to a deficiency decree usually depends on the facts and circumstances of each case, and, since the mortgaged premises constitute the primary fund for the payment of the mortgage debt, it is only where the mortgagee has endeavored to collect it out of the land that a just judgment for deficiency can be entered. While it has been held that the power to render a deficiency decree is governed by the rules which would apply at law, it has also been held that the court has jurisdiction after a foreclosure sale to determine any intervening fact which would make it inequitable to enter a deficiency decree. Accordingly, no right to a deficiency judgment vests until plaintiff satisfies equity that it would be equitable, in the light of the sale price, to authorize a deficiency judgment. 59 C.J.S., Mortgages § 778, p. 1474 (1949) (emphasis added). As will be shown, however, the assertion stated in the C.J.S. encyclopedia, and cited in Mississippi Valley, is supported by no law. The article footnotes only two cases from which the equitable requirement was derived; one from Illinois, and the other from New York. ¶ 72. The Illinois Court of Appeals case of Collins v. Baim, 299 Ill.App. 405, 413, 20 N.E.2d 298 (1939), addressed the equitable question of whether or not a bond owner who was not a party to the deficiency decree was entitled to the benefits from that decree. Id. at 413, 20 N.E.2d 298. The result turned on principles of res judicata, and had nothing whatsoever to do with requiring an equitable price at a foreclosure sale. Id. ¶ 73. The New York case, Monaghan v. May, 242 A.D. 64, 66-67, 273 N.Y.S. 475 (N.Y.App.Div.1934), was handed down by the Supreme Court of New York in 1934. There, it was held that a court of equity could deny a deficiency decree when the price of the underlying foreclosure sale made it inequitable to do so. Monaghan, 242 A.D. 64, 66-67, 273 N.Y.S. 475. The New York court's rationale closely mirrors this Court's holding in Mississippi Valley. However, Monaghan is easily distinguished from the case before us today by one crucial fact-Mississippi's legislature has enacted a statute which addresses (and, in my view, controls) the creditor's right to a deficiency. As of 1934 when Monaghan was handed down, New York's legislature had not. See Id. at 67, 273 N.Y.S. 475 ( citing Home Bldg. & Loan Ass'n v. Blaisdell, 290 U.S. 398, 446, 54 S.Ct. 231, 78 L.Ed. 413 (1934)). ¶ 74. The United States Supreme Court case of Home Building and Loan Association v. Blaisdell, 290 U.S. 398, 54 S.Ct. 231, 78 L.Ed. 413 (1934), preceded Monaghan by six months, and was the sole authority the New York court cited in its Monaghan opinion. The Blaisdell Court opined that  [i]n the absence of legislation, courts of equity have exercised discretion in suits for the foreclosure of mortgages to fix the time and terms of sale and to refuse to confirm sales upon equitable grounds where they are found to be unfair or inadequacy of price was so gross as to shock the conscience. Blaisdell, 290 U.S. 398, 446, 54 S.Ct. 231, 78 L.Ed. 413 (1934) (emphasis added). The first five words quoted above from this United States Supreme Court authority sum up nicely the reasoning for my dissent. ¶ 75. As stated above, our Legislature has, indeed, enacted legislation which controls a creditor's right to a deficiency. See Miss.Code Ann. § 11-5-111 (Rev.2002). Thus, the Monaghan decision simply has no application here and therefore, the C.J.S. encyclopedia article cited in Mississippi Valley also is wholly inapposite to the case before us.
¶ 76. Following this quantum leap in Mississippi Valley, this Court fired its next attack on strict statutory construction and the separation of powers (in the foreclosure context) in Lake Hillsdale Estates, Inc. v. Galloway, 473 So.2d 461 (Miss. 1985). And as it had done previously in Weyburn, the Lake Hillsdale Court again used dictum as ammunition. ¶ 77. In Lake Hillsdale, the mortgagor sued the mortgagee and the trustee, alleging numerous deficiencies in the foreclosure sale and the deficiency decree. Finding no reversible error on procedural grounds, and no breach of duty by the trustee, this Court turned to the adequacy of consideration paid at the foreclosure sale. ¶ 78. The price paid was first evaluated in the context of whether it was insufficient to sustain the foreclosure sale. This Court observed that the chancery court made no finding of fair market value of the property. Absent that value, this Court cannot find that the sale price was such that shocks the conscience of the court. Thus, the chancellor's refusal to set aside the sale was affirmed. ¶ 79. This holding in Lake Hillsdale is significant, not because this Court again used the shock-the-conscience test in evaluating whether to set aside the foreclosure, but because the Court made it clear that the burden was on the mortgagor. That is to say, the mortgagor must provide the proof necessary to convince the Court that its conscience has been shocked and, absent that proof, the foreclosure will be upheld. ¶ 80. The Lake Hillsdale Court turned next to the deficiency judgment, stating that: Our decision in Mississippi Valley Title makes it clear that something more than a difference between the price paid at the foreclosure and the amount of the indebtedness must be demonstrated before the mortgagee is entitled to a deficiency judgment.... Though we have concluded that the price paid at the foreclosure sale was not so inadequate as to require setting aside the sale, we cannot conclude that the value of the property thereby obtained is insufficient to satisfy the indebtedness of the mortgagor. In any case, no proof to that effect has been offered by the [mortgagee]. We hold, consistent with our decision in Mississippi Valley Title Insurance that in order to obtain a deficiency judgment, the mortgagee has the burden of proving its entitlement under principles of equity to a deficiency judgment. We reverse the court's ruling and remand for a new hearing to first determine if the mortgagee has endeavored to collect the indebtedness out of the land. Then, it must be determined whether the value of the property satisfies the debt of the mortgagor or creates a surplus. [12] Only then can a decision be made as to the propriety of [the deficiency judgment]. Id. at 466 (emphasis added). ¶ 81. Therefore, the Lake Hillsdale Court placed the burden of proof on the mortgagor with respect to setting aside the foreclosure sale, and upon the mortgagee with respect to the deficiency. More important, however, was the Lake Hillsdale Court's bold statement that meeting the requirements of Section 11-5-111 will not suffice to entitle a mortgagee to a deficiency. Something more would be required. Id. at 466.