Murphy v. Wachovia Bank of Del., N.A.

• Decision Date: 13 August 2015
• Docket Number: No. 13–P–1943.,13–P–1943.
• Citation: 88 Mass.App.Ct. 9,36 N.E.3d 48
• Parties: Harold B. MURPHY, trustee, v. WACHOVIA BANK OF DELAWARE, N.A., & another.
• Court: Appeals Court of Massachusetts

88 Mass.App.Ct. 9

36 N.E.3d 48

Harold B. MURPHY, trustee¹

v.WACHOVIA BANK OF DELAWARE, N.A., & another.²

No. 13–P–1943.

Appeals Court of Massachusetts, Middlesex.

Argued Nov. 12, 2014.

Decided Aug. 13, 2015.

David M. Bizar, Boston, for Wachovia Bank of Delaware, N.A.

John C. Elstad, Boston, for the plaintiff.

Present: KAFKER, COHEN, & MILKEY, JJ.

Opinion

COHEN, J.

This case concerns the proper distribution of surplus funds after a foreclosure sale initiated and conducted by the holder of a second mortgage. After a jury-waived trial, a judge of the Superior Court ruled that defendant Wachovia Bank of Delaware, N.A. (Wachovia), erroneously distributed surplus funds to the holder of the first mortgage, Wells Fargo Bank, N.A. (Wells Fargo), instead of to the mortgagor, Nigel Thorpe. The judge therefore ordered Wachovia to pay $178,626.61, plus interest and costs, to the plaintiff, Harold B. Murphy, as trustee of the bankruptcy estate of Thorpe (trustee). On appeal, Wachovia argues that it was entitled to disburse the funds to Wells Fargo, but even if it was not, it had valid equitable defenses to the trustee's

claims.³ For the reasons that follow, we affirm.

Background. We summarize the judge's findings, supplemented by additional undisputed facts.⁴ Prior to the foreclosure sale, Thorpe was the owner of residential property in Wilmington. The property was encumbered by two mortgages: a first mortgage dated March 23, 1999, held by Wells Fargo, and a second mortgage, dated July 26, 2000, held by Wachovia.

In March, 2006, Thorpe defaulted on the payment obligations secured by the second mortgage, and Wachovia exercised its statutory power of sale to foreclose on the property.⁵ The notice of sale to Thorpe and to any potential buyers provided that “[b]y virtue and in execution of the Power of Sale contained in [the second mortgage], ... [t]hese premises will be sold and conveyed subject to ... all unpaid ... liens or existing encumbrances of record which are in force and are applicable, having priority over said mortgage.”

On July 25, 2006, Wachovia conducted a foreclosure auction. At that time, the outstanding debt secured by the Wachovia mortgage was $130,000, and the outstanding debt secured by the Wells Fargo mortgage was slightly more than $178,000. The Coniston Group, Inc. (Coniston), submitted a winning bid of $420,000, and transmitted a $10,000 deposit to Wachovia's attorney. Coniston's bid was substantially lower than the appraised value of the property, which was between $610,000 and $690,000, and did not include an amount to discharge the Wells Fargo mortgage.

The sale closed on August 25, 2006, with Coniston's attorney acting as settlement agent.⁶ Wachovia received $231,373.79, which exceeded by $64,502.96 the amount needed to satisfy the second mortgage debt plus Wachovia's costs of foreclosure. In addition, Coniston's $10,000 deposit remained in the possession of Wachovia's attorney. Although Wells Fargo was not a party to

the foreclosure proceedings, it received $178,626.61, the amount required to discharge the first mortgage. Wells Fargo obtained this disbursement even though both the contract of sale and the foreclosure deed contained provisions stating that the property was being conveyed “subject to all outstanding ... liens.” The end result was that both the first and second mortgages were paid off, Coniston took the property free and clear of the first mortgage despite the terms of the sale, and Wachovia received funds that exceeded the combined mortgage debt and costs of foreclosure.

In a letter dated January 23, 2007, Thorpe demanded of Wachovia payment of all surplus foreclosure proceeds, including the amount disbursed to Wells Fargo. By means of two payments ($64,502.96 on March 12, 2007, and $10,000 on March 16, 2007), Wachovia transmitted to Thorpe the excess funds it had received and retained. Thorpe's further claim, that Wachovia wrongly paid off the Wells Fargo mortgage and, therefore, owed him an additional $178,626.61, remained unresolved.⁷

While these events were taking place, Thorpe and his wife were engaged in divorce proceedings in the Middlesex Division of the Probate and Family Court Department. Throughout the divorce proceedings, which were not concluded until June, 2007,⁸ Thorpe never disclosed his claims against Wachovia or the fact that, in March of 2007, Wachovia had paid him $74,502.96.

In January, 2008, Thorpe filed a voluntary petition under Chapter 7 of the United States Bankruptcy Code and a schedule of assets and liabilities. Thorpe again failed to disclose both the $74,502.96 that he had received from Wachovia, and his additional claim against Wachovia for $178,626.61. Ultimately, the trustee determined that there were no nonexempt assets available for distribution to creditors. As a result, in April of 2008, a judge of the United States Bankruptcy Court for the District of Massachusetts discharged Thorpe's scheduled liabilities, totaling $888,000, and closed the case.

On May 29, 2008, Thorpe commenced the present action in the Superior Court; however, because he had failed to disclose his claims against Wachovia during the bankruptcy proceedings, a judge later determined that he was not the true owner of the

claims and could not enforce them.⁹ The judge ordered Thorpe to notify the Bankruptcy Court and the trustee, and, on August 17, 2011, the trustee was allowed to be substituted as the plaintiff.

By the time of trial, various theories of recovery had been rejected on summary judgment, and the only live issue was whether Wachovia had deprived Thorpe of his legal right to the funds disbursed to Wells Fargo, in violation of G.L. c. 183, § 27, and the terms of the mortgage. After a bench trial based largely on stipulated facts, the trial judge concluded that Wachovia had been required to disburse the surplus to Thorpe, and that Wachovia's equitable defenses, which were based upon Thorpe's misrepresentations in the divorce and bankruptcy cases, were not an impediment to the trustee's claims on behalf of Thorpe's creditors.¹⁰ Judgment entered for the trustee, and Wachovia's appeal ensued.

Discussion. 1. Disbursement of surplus funds. Wachovia does not challenge the judge's findings; it claims only that the judge erroneously ruled that the excess funds should not have been disbursed to Wells Fargo. We review the judge's legal conclusions de novo. See, e.g., Martin v. Simmons Properties, LLC, 467 Mass. 1, 8, 2 N.E.3d 885 (2014).

“Generally, a mortgagee must give a mortgagor any surplus generated at a foreclosure sale.” Duclersaint v. Federal Natl. Mort. Assn., 427 Mass. 809, 811, 696 N.E.2d 536 (1998), citing G.L. c. 183, § 27.¹¹ See Goldman v. Damon, 272 Mass. 302, 305, 172 N.E. 226 (1930). Here, Wachovia offers two alternative justifications for departing from this general rule. The first is that the language in the power of sale clause of the second mortgage expanded the universe of those entitled to receive the surplus to include the first mortgagee, Wells Fargo; the second is that Wells Fargo was required to be treated as a successor or assignee of Thorpe. Neither justification is sound.

a. Power of sale clause. The power of sale clause in the second mortgage provides in relevant part: “The proceeds of the sale shall be applied in the following order: (a) to all reasonable costs and expenses of the sale, including reasonable attorneys' fees and costs of title evidence; (b) to all sums secured by this Mortgage; and (c) the excess, if any, to the person or persons legally entitled thereto ” (emphasis supplied). According to Wachovia, Wells Fargo was “legally entitled” to the surplus funds because its interest was superior to Thorpe's and attached not only to the property but also to the proceeds of any sale.

It is firmly established, however, that a buyer at a foreclosure sale initiated by a junior mortgagee takes the land subject to any senior mortgage or lien. See G.L. c. 244, § 14 ;¹² Dearnaley v. Chase, 136 Mass. 288, 289 (1884) (“[The junior mortgagee] had a right to sell what was conveyed to him by his mortgage, which was the land subject to the prior mortgage”); Antonellis v. Weinstein, 258 Mass. 323, 326, 154 N.E. 850 (1927) (“It is plain that the [junior mortgagee's] sale in the present case could not legally include prior mortgages”); Marshall v. Francis, 332 Mass. 282, 285, 124 N.E.2d 803 (1955) (foreclosure by junior mortgagee had no effect on senior mortgagee). See also Osborne, Mortgages § 323, at 674 (2d ed. 1970) (“A junior mortgagee's security is the property subject to prior encumbrances”). Accordingly, “[t]he bids made at [a foreclosure] sale must be for that which is to be sold and for that alone; that is to say, the bids must be for the value of the interest in the estate which will pass under the foreclosure deed. If there are prior mortgages, these cannot be sold, and their amount ought not to be included in the bids.” Brooks v. Bennett, 277 Mass. 8, 16, 177 N.E. 685 (1931).

As the judge found, the admonition in Brooks v. Bennett was

heeded here: the notice of sale specified that the property would be sold subject to prior liens; consistent with that understanding, Coniston's bid of $420,000 was substantially less than the appraised value of the property and, as the judge found, did not include an amount to discharge the Wells Fargo mortgage; the transaction concluded with a foreclosure deed setting forth $420,000 as the consideration for the interests that passed under the foreclosure deed; and that deed expressly stated that those interests were subject to outstanding liens. In these circumstances, where Coniston took the property subject to the Wells Fargo mortgage, Wells Fargo was not “legally entitled” to a distribution of surplus funds.¹³

b. Successor or assignee. There is “well established case law that recognizes an equitable lien in the surplus proceeds of a foreclosure sale in junior mortgagees” (emphasis supplied). First Colonial Bank for...