Court Opinion

ID: 9760961
Source: CourtListenerOpinion
Date Created: 2023-08-29 01:26:18.806171+00
Date Added: 2024-06-11T07:29:19.196406
License: Public Domain

MAUZY, Justice,
dissenting.
The Court has decided to require the use of the outstanding balance method in calculating the deficiency or surplus after foreclosure of a mortgage securing a “wraparound note.” Because I believe that the express terms of the contract dictate that the maker of the wrap-around note should be liable only for the actual amount of money advanced or credit extended to him by the holder of the note, I dissent.
In determining the issues in this case, it is helpful to examine the nature and purpose of wrap-around financing. Although referred to as a “new” or recent trend in real estate financing, see Annotation, Validity and Effect of Wrap Around Mortgages Whereby Purchaser Incorporates into Agreed Payments to Grantor Latter’s Obligation on Initial Mortgage, 36 A.L.R. 4th 144, 148 (1985), the wrap-around mortgage emerged in the 1930s. Gunning, The Wrap-Around Mortgage ... Friend or U.F.O.?, 2 Real Estate Rev., Summer 1972 at 35; Comment, The Wrap-Around Mortgage: A Critical Inquiry, 21 U.C.L.A. L.Rev. 1529, 1529 (1974). Identified with periods of high interest rates and a tight money market, Comment, 21 U.C.L.A.L. Rev. at 1529, the wrap-around mortgage recently gained new-found popularity because it generates an increased loan yield for lending institutions. R. Kratovil & R. Werner, Real Estate Law, 379 (1988). At the same time, the borrower achieves an overall lower financing cost. Other advantages envisioned in the wrap-around mortgage include assorted tax benefits and avoidance of acceleration under a due-on-sale clause contained in senior mortgage notes. Nevertheless, earlier critical inquiries question the actual existence or legality of these envisioned benefits. Critics pointed out that the uncertainty surrounding wrap-around financing made reliance on such benefits speculative at best. Comment, 21 U.C.L.A.L.Rev. at 1531.
Intentions of the Parties
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 wraparound 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 *585intent 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 wraparound 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 appar*586ent intentions of the parties as expressed in the “subject to” language and in the wraparound 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 wraparound 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.

. The best way to avoid this risk would be to take the advice proffered by Polonius to Laertes, "neither a borrower nor a lender be." W. Shakespeare, Hamlet, Prince of Denmark Act I, Scene III (Avenel Books ed. 1975). Also the parties could have avoided these risks by undertaking a safer, more certain means of financing the transaction.

. Other states’ interpretations of wrap-around transactions were in each case governed by the terms of the applicable wrap-around documents. Appropriately, these opinions are inherently limited to their own specific clauses, such as the Maryland court of appeals’ construction of a "subject to” clause in Daugharthy v. Monritt Assoc., 293 Md. 399, 444 A.2d 1030 (1982), provides persuasive authority in cases interpreting similar provisions.

. See e.g. Bentley, “The Wrap-Around Mortgage: Analyzing and Documenting," Advanced Real Estate Law Course, State Bar of Texas, Volume 2 (May 1986). Bentley suggests that the following recital should be included in the trustee's deed if the purchaser’s bid reflects consideration for taking the property "subject to” the underlying liens:
"The undersigned, as Substitute Trustee, did on the _ day of _, 19_, sell the Mortgaged Premises at a public sale, at the courthouse door of_County, Texas, to _ ("Grantee”), being the highest bidder, for the sum of $_[gross price] of which the sum of $_[prior mortgage balance] is represented by Grantee's acceptance of the Mortgaged Premises subject to the prior mortgage documents described in Exhibit B hereto."
Bentley adds, "[T]his type of recital seems to achieve the effect of a 'net' bid, but should make it clear that the total amount of the bid is the credit to be given against the note being foreclosed.” Id. at 61.