Weinstein v. Park Funding Corp., 93CA0109

• Decision Date: 14 July 1994
• Docket Number: No. 93CA0109,93CA0109
• Citation: 879 P.2d 462
• Parties: Lee H. WEINSTEIN, Peter Brown, David Brown, and Adam Brown, Plaintiffs-Appellees, v. PARK FUNDING CORP., a Colorado corporation, Defendant-Appellant. . II
• Court: Colorado Court of Appeals

Page 462

879 P.2d 462

Lee H. WEINSTEIN, Peter Brown, David Brown, and Adam Brown Plaintiffs-Appellees, v. PARK FUNDING CORP., a Colorado corporation, Defendant-Appellant.

No. 93CA0109.

Colorado Court of Appeals Div. II.

July 14, 1994.

Karsh & Fulton, P.C., Alan E. Karsh, Denver, for plaintiffs-appellees.

Berenbaum & Weinshienk, P.C., Martin D. Buckley, Patricia S. Bellac, Denver, for defendant-appellant.

Opinion by Judge TAUBMAN.

Defendant, Park Funding Corp. (Park Funding), appeals the judgment entered pursuant to C.R.C.P. 54(b) in favor of plaintiffs, Lee H. Weinstein, Peter Brown, David Brown, and Adam Brown (collectively Weinstein). Specifically, Park Funding appeals the trial court's ruling that Weinstein was entitled to allocate the proceeds from a foreclosure sale solely to the non-recourse portion of the indebtedness secured by a deed of trust. It also appeals the trial court's award of taxes in addition to the deficiency, the inclusion of a defaulted payment as accrued and unpaid interest, and a clerical error in the amount of the deficiency. We affirm in part, reverse in part, and remand for proceedings consistent with this opinion.

In 1981, Park Funding purchased commercial real estate known as Citadel Station from Weinstein, who provided the financing for the purchase and received four promissory notes secured by a deed of trust in his favor. The notes were non-recourse and secured only by the property with two exceptions: The notes provided that Park Funding would be personally liable for "accrued and unpaid interest which has been deferred and added to principal" and for "any liens which result from the actions of [Park Funding] and its successors or assigns, that may be imposed upon all or any portion of the tract conveyed ... if said liens have ... priority over the deed of trust...."

In 1987, Park Funding transferred Citadel Station to Legreje Corporation. Legreje assumed the promissory notes and deed of trust. Under the terms of the assumption agreement, Legreje agreed that no additional interest amounts would be deferred and added to principal. Legreje made payments as required by the assumption agreement until July 1989 when it defaulted on its payments.

After the default, Weinstein declared the notes due in full and initiated foreclosure proceedings with the Douglas County Public Trustee on the property secured by the notes. Park Funding and its counsel received notice of the intended foreclosure pursuant to the provisions in the deed of trust. Weinstein's appraiser valued the property at $900,000 and Weinstein submitted a bid of $1,599,177.63 to the Public Trustee. That bid specified how the proceeds were to be apportioned if Weinstein received the property at the sale.

The Trustee sold the property to Weinstein, the sole bidder, at the foreclosure sale on April 24, 1990. Park Funding did not appear at or contest the foreclosure proceedings. The redemption period expired without redemption of the property.

The outstanding debt under the notes was $2,093,281.81. Thus, the sale resulted in a deficiency of $534,103.55 for accrued and unpaid interest. The trustee announced Weinstein's bid and this deficiency at the foreclosure sale, but did not allocate the deficiency as described in Weinstein's bid.

In June 1990, Weinstein filed suit in district court to recover the deficiency from Park Funding, alleging that Park Funding and Legreje were jointly and severally liable for accrued and deferred interest in the amount of $534,103.55 and for unpaid real estate taxes owed for 1988, 1989, and 1990.

The trial court entered an order, pursuant to C.R.C.P. 54(b), that Weinstein could specify the allocation of his bid amount and finding that, in addition to the deficiency, Park Funding was liable for unpaid real estate taxes in the amount of $207,222.01 for 1988 and 1989.

I. Application of the Proceeds from Foreclosure

Park Funding argues that the trial court improperly held that Weinstein was entitled to direct application of the proceeds from the foreclosure sale to those portions of the debt which were non-recourse. We agree but conclude that the ruling should be affirmed on other grounds.

Weinstein argues that, under the traditional rule of payments, he could determine the application of the proceeds if Park Funding failed to do so. He relies on Weston Group, Inc. v. A.B. Hirschfeld Press, Inc., 845 P.2d 1162 (Colo.1993), in which the supreme court held that, if a debtor owes secured and unsecured debts to the same creditor, the debtor has the right, at the time of payment, to direct the application of its voluntary payments, but that, if the debtor does not provide such direction, then the creditor, at the time of payment, may elect to apply the payments to either of the debts. Weinstein argues that this rule extends to the foreclosure proceeds on a deed of trust in which a portion of the debt is secured only by the property and another portion has additional security.

However, relying on Toll v. Colorado National Bank, 86 Colo. 529, 283 P. 778 (1929), Park Funding asserts that the proceeds from a foreclosure sale should be applied ratably between the less secured portion of the debt and the more secured portion. In Toll, the supreme court held that assignees holding several notes were entitled to share pro rata without preference if the proceeds were insufficient to satisfy all debts.

Here, since the record shows that the foreclosure proceeds were distributed ratably among plaintiffs, Toll is distinguishable. Thus, the issue remains as to whether the foreclosure proceeds may be apportioned by the creditor if the debtor is silent concerning how the payment should be apportioned. Toll does not address this issue, which appears to be one of first impression for our courts.

We conclude that Weston Group, supra, is inapplicable because the proceeds of a foreclosure sale are considered to be involuntary, rather than voluntary, payments. See Massachusetts Mutual Life Insurance Co. v. Paust, 212 Minn. 56, 2 N.W.2d 410 (1942). Absent an agreement to the contrary, such involuntary payments must be applied by the court according to equitable principles.

Courts have disagreed in interpreting what equity mandates. In Adams v. Taylor, 253 N.C. 411, 117 S.E.2d 27 (1960), for example, the North Carolina Supreme Court applied principles of intrinsic justice to determine the proper apportionment of proceeds from a government condemnation. The court concluded that the proceeds must be applied ratably between the debt's principal and interest because a different application would accelerate the monthly installment payments contrary to the note's provisions. See also First National City Bank v. Kline, 439 F.Supp. 726 (S.D.N.Y.1977) (court applied bankruptcy proceeds ratably among several debts); State Bank of Streeter v. Nester, 385 N.W.2d 95 (N.D.1986) (pro rata distribution of proceeds allowed where third party bank had power to protect itself better).

However, other courts hold that, if a part of the debt secured by a deed of trust is protected by other agreements to pay the debt, equity dictates that the net proceeds of the foreclosure sale be applied to that part of the debt for which the creditor holds no collateral other than the agreement to repay. See Prudential Insurance Co. v. Enkema Holding Co., 196 Minn. 154, 264 N.W. 576 (1936); Federal Land Bank v. Fulcher, 47 Ga.App. 602, 171 S.E. 152 (1933); see generally Massachusetts Mutual Life Insurance Co. v. Paust, supra (foreclosure proceeds applied to claims barred by statute of limitations first to ensure creditor's maximum recovery); Lipscomb v. Tucker, 294 Ala. 246, 314 So.2d 840 (1975) (insufficient evidence of additional unsecured note to allow application of foreclosure proceeds to be applied to it first).

We find persuasive the reasoning of those courts that hold that equity requires courts to apply the proceeds from a foreclosure sale in a manner which provides the creditor the greatest opportunity to recover payment for the full debt. In other words, when a creditor has received collateral covering the entire debt, and a personal guaranty on part of it, there is a presumption, in the absence of circumstances showing the contrary, that the personal guaranty is an additional protection for the creditor. In such circumstances, the creditor may apply any proceeds to that part of the debt not covered by the personal guaranty, and thus hold the guarantor to his or her contract. See Federal Land Bank v. Fulcher, supra.

Here, both parties were sophisticated businessmen, both were represented by attorneys during the negotiation of the notes and deeds of trust. And, both agreed to the additional recourse provisions. Thus, the trial court, exercising its equitable powers, had authority to allocate those proceeds in the creditor's best interest by directing they be applied first to the indebtedness without a personal guaranty.

Under the rule we adopt here, Weinstein could not direct the application of the foreclosure proceeds unless there existed a specific agreement with Park Funding. Since there was no such agreement, the trial court incorrectly determined that Weinstein could specify the application of the foreclosure proceeds.

However, because we conclude the trial court reached the correct result, we will not reverse its judgment on this issue. See Frank C. Klein & Co. v. Colorado Compensation Insurance Authority, 859 P.2d 323 (Colo.App.1993).

Since we conclude that Weinstein was not entitled to direct the application of the proceeds from the foreclosure sale, we need not address whether Park Funding was entitled to specific notice of the application of the foreclosure proceeds.

II. Unpaid Real Estate Taxes

Park Funding contends that the trial court erred in finding it liable for the unpaid 1988 and 1989 real estate taxes owed in addition to the deficiency amount. We disagree.

A.

Park Funding argues that § 38-38-106,...