Dixieland Realty Co. v. Wysor, 210

• Decision Date: 13 December 1967
• Docket Number: No. 210,210
• Citation: 158 S.E.2d 7,272 N.C. 172
• Court: North Carolina Supreme Court
• Parties: DIXIELAND REALTY COMPANY, a corporation, Petitioner, v. Joe R. WYSOR and wife, Alice Wysor; Hawthorne Sales Company, Inc., acorporation; Sam Ware; Quentin Bollinger t/a Bollinger Electric Company; NolenConcrete Supply Company; Bess Brothers, Inc., Rainbow Paint Store, J. A. Brown,Witten SupplyCompany, and Nixon Exterminating Company, B. B. Banner, Jr., Defendants.

Page 7

158 S.E.2d 7

272 N.C. 172

DIXIELAND REALTY COMPANY, a corporation, Petitioner, v. Joe R. WYSOR and wife, Alice Wysor; Hawthorne Sales Company Inc., acorporation; Sam Ware; Quentin Bollinger t/a Bollinger Electric Company; NolenConcrete Supply Company Bess Brothers, Inc., Rainbow Paint Store, J. A. Brown,Witten SupplyCompany, and Nixon Exterminating Company, B. B Banner, Jr., Defendants.

No. 210.

Supreme Court of North Carolina.

Dec. 13, 1967.

Horace M. Dubose, III, Gastonia, for defendant appellants, Ware and Bollinger.

Joseph B. Roberts, III, Gastonia, for B. B. Banner, Jr.

Garland, Alala, Bradley & Gray, Gastonia, for Nolen Concrete Co. and Witten Supply Company.

No counsel contra.

BRANCH, Justice.

The question presented for decision by this appeal is whether the trial court erred in entering order denying motion of respondents Bollinger and Ware to marshal assets.

Appellants contend that the foreclosure of the senior deed of trust did not extinguish the lien of the junior deed of trust.

It is recognized in this jurisdiction that both equity and law permit the grantor in a deed of trust to purchase his own property at foreclosure sale. In re Sale of Land of Sharpe, 230 N.C. 412, 53 S.E.2d 302; Wilson v. Vreeland, 176 N.C. 504, 97 S.E. 427.

Ordinarily, all encumbrances and liens which the mortgagor or trustor imposed on the property subsequent to the execution and recording of the senior mortgage or deed of trust will be extinguished by sale under foreclosure of the senior instrument. St. Louis Union Trust Co. v. Foster, 211 N.C. 331, 190 S.E.522.

In event there is any surplus after satisfaction of the debt of the senior lien, the trustee should pay it to the owner of equity of redemption or to the discharge of the junior liens, as the facts require. If adverse claims are asserted or there is doubt as to who is entitled thereto, the trustee may be discharged of liability by paying any surplus in his hands to the clerk of superior court pursuant to G.S. § 45--21.31(b). Staunton Military Academy v. Dockery, 244 N.C. 427, 94 S.E.2d 354; Bobbitt v. Stanton, 120 N.C. 253, 26 S.E. 817.

Accepting these principles of law, we must, however, consider the effect upon the junior liens when the trustor purchases his own property from the trustee upon the foreclosure under power of sale in the senior deed of trust.

The authorities in this State are understandably meager since the question presented in this case grows out of the very unusual situation of a trustor who is in default on his obligation appearing at the trustee's sale with a sufficient sum to pay the full debt secured by the senior lien plus the accrued costs of the sale.

There is a sharp divergence of opinion on this question in the several jurisdictions.

In 59 C.J.S. Mortgages § 577, p. 973, it is stated:

'The mortgagor or grantor of a deed of trust may always purchase at a sale of his own property by the mortgagee or trustee, but he cannot by such purchase defeat the right of recovery under subsequent encumbrances, * * *.'

One line of authorities is represented by the case of Huzzey v. Heffernan, 143 Mass. 232, 9 N.E. 570, where a second mortgagee claimed that when property was reconveyed to the mortgagor by a third person who purchased it upon foreclosure sale under power of the first mortgage, the second mortgage revived and attached to the property on the ground that mortgagor was estopped by his warranty to deny the second mortgagee's title. The Court held that the foreclosure sale terminated the second mortgagee's interest, noting that the covenant in the second mortgage 'is that the grantor will warrant and defend the premises against the lawful claims and demands of all persons except those claiming under the prior mortgage,' which is not a general warranty. By asserting title acquired under foreclosure of the first mortgage, the mortgagor does not allege anything inconsistent with his assertions in his deed. The mortgagor asserts in his deed that the prior mortgage is a paramount title. To give the doctrine of estoppel the operation which the second mortgagee claims would be to enlarge the mortgagor's covenant to a general covenant of warranty.

Plum v. Studebaker, 89 Mo. 162, 1 S.W. 217, is in accord with the view of Huzzey v. Heffernan, supra. Here, H. C. Bettes and wife, Amanda, gave a deed of trust in 1879 to secure a debt due from W. H. Bettes & Co. to Mary Atherton. The firm was composed of W. H. and J. J. Bettes and they and their wives also joined in the deed which conveyed the land owned by Amanda and other property not owned by her. In 1881, the same grantors made another deed of trust on the same property to secure a debt of H. C. Bettes & Sons to defendants, Studebaker Bros. The latter deed of trust was made subject to the prior one. Thereafter W. H. Atherton, who represented the Mary Atherton debt, purchased the property at a trustee's sale under the first deed of trust and subsequently conveyed it by warranty deed to Amanda, who conveyed to plaintiff. The Court, in holding that plaintiff took title free from any lien of the second deed of trust, stated:

'* * * under our system of deeds of trust, the trustee's sale operated as a complete foreclosure, and cut off the second deed of trust as completely as if there had been a decree of foreclosure with all the parties before the court. Atherton got a perfect title as against the defendants, and it was entirely competent for Amanda Bettes to acquire that title, for she owed no duty inconsistent therewith.'

A divergent view is stated in the case of Jensen v. Duke, 71 Cal.App. 210, 234 P. 876, where one Jensen executed a deed of trust to Abbott and then sold the property conveyed in the deed of trust, and subject thereto, to Duke. Duke executed a mortgage to Jensen. The first deed of trust was foreclosed and the purchaser at the foreclosure sale conveyed the property back to Duke. The case was brought to court by an action to foreclose the Jensen mortgage. Section 2930 of California Civil Code provides:

'Title acquired by the mortgagor subsequent to the execution of the mortgage, inures to the mortgagee as security for the debt in like manner as if acquired before the execution.'

Holding that the Jensen deed of trust was revived by inurement and that the ruling in Plum v. Studebaker, supra, was not the correct law in the State of California, the Court said:

'* * * the reason of the rule which absolutely extinguishes junior mortgage lien following foreclosure of senior lien, the purchaser at foreclosure sale and his successors in interest being other than the mortgagor, would seem not to apply as to the mortgagor acquiring the title from foreclosure of the first mortgage, whether he acquired title directly under foreclosure deed or indirectly and as the grantee of a third party foreclosure-purchaser.'

In accord with the view expressed by Jensen v. Duke, supra, is the case of Martin v. Raleigh State Bank, 146 Miss. 1, 111 So. 448, 51 A.L.R. 442. There Martin executed a deed of trust to the Bank, which, in the body of the instrument, stated it was a second deed of trust, and further expressly stated that the second deed of trust was subject to the first deed of trust. The first deed of trust was foreclosed and title later was revested in Martin. The second deed of trust was then foreclosed and the beneficiary in the deed of trust bought in at the sale and brought this action for possession. The Court held, upon the ground of estoppel, that the trustor's title, acquired from a third person who purchased at the foreclosure of the first mortgage, was subject to the second mortgage.

Jones v. Kingsey, 55 N.C. 463, is the only North Carolina case which we find directly on the question under consideration. In that case defendant, being indebted to plaintiff in the sum of $1136.00, executed a mortgage-deed to plaintiff to secure payment thereof. Upon default in payment, this bill was filed for foreclosure of the equity of redemption or, in the alternative for a sale of the mortgaged premises. Defendant alleged that shortly after execution of the mortgage-deed he discovered that there was a judgment and execution outstanding wherein defendant was surety for another person, forming a prior lien to the mortgage-deed, of which he was not aware at the time of executing the deed. Plaintiff was advised of the situation, and he promised to advance the necessary funds to remove the prior encumbrance and to look to the mortgage-deed as security for this further sum. Plaintiff failed to perform this promise and permitted the property to be sold under execution. One Francis became the purchaser of the premises and thereafter conveyed to defendant. The surplus of $400, after satisfaction of the execution, was paid to plaintiff on his debt. The headnote in this case accurately states the holding of the Court as follows: 'Where the mortgaged premises were sold under a prior lien, and bought by a third person, who sold again to the mortgagor, the rights of the mortgagee are not impaired by this transaction; so far from it, it will be regarded only as the removal of an incumbrance, which it was the duty of the mortgagor to effect.'

The result in Jones v. Kingsey, supra, is recognized and approved by many text-writers. It is stated in 2 Wiltsie on Mortgage Foreclosure § 835 (5th ed. 1939):

'Where the owner of mortgaged premises, who has given a junior mortgage thereon, purchases the property upon a sale under a senior mortgage, the rule is that his purchase will not defeat the junior mortgage but will operate for the benefit of it in the same way as a discharge or transfer of the mortgage to himself would have done.'

See also 3 Jones on Mortgages § 1887 (8th ed. 1928).

In those jurisdictions which hold that the junior lien is not extinguished when the trustor purchases at foreclosure sale under a senior deed of trust, the great majority of the decisions are based on the...