Wornat Development Corp. v. Vakalis

• Decision Date: 08 November 1988
• Citation: 529 N.E.2d 1329,403 Mass. 340
• Parties: WORNAT DEVELOPMENT CORPORATION v. George VAKALIS et al. 1 (and two consolidated cases 2 ).
• Court: United States State Supreme Judicial Court of Massachusetts Supreme Court

Page 1329

529 N.E.2d 1329

403 Mass. 340

WORNAT DEVELOPMENT CORPORATION v. George VAKALIS et al. ¹ (and two consolidated cases ²).

Supreme Judicial Court of Massachusetts, Suffolk and Worcester.

Argued Sept. 15, 1988.

Decided Nov. 8, 1988.

Joseph P. Secola, Milford, Conn. (Lawrence S. Walters, Jr., Branford, Conn., and Adolphe A. Storey, East Longmeadow, with him), for George Vakalis et al.

Burton Chandler Worcester, for Wornat Development Corp.

Sarah Wunsch, Asst. Atty. Gen., for Superior Court.

Before HENNESSEY, C.J., and WILKINS, ABRAMS and LYNCH, JJ.

HENNESSEY, Chief Justice.

The defendant George Vakalis appeals from judgments of a Superior Court judge in two consolidated actions: one, a contract action for a deficiency after a mortgage foreclosure, the other, an action to reach and apply under G.L. c. 214, § 3(6). Vakalis also appeals from the judgment of a single justice of this court dismissing Vakalis's action under G.L. c. 211, § 3, for extraordinary relief from rulings in the deficiency and the reach and apply actions. We consolidated the appeals. ³ We affirm the judgments.

On November 19, 1973, the defendants, George Vakalis, Harland Shapiro, and Bert Robinson, executed a promissory note to Wornat Development Corporation (Wornat) in exchange for a loan of $75,000. A mortgage deed to real estate in Rockingham, Vermont, secured the note. The note stated that it should be construed under Massachusetts law. The defendants defaulted on the note and Wornat commenced a "strict foreclosure" proceeding in the Vermont Superior Court. ⁴ That court issued a foreclosure decree in December, 1977, which became final and extinguished the defendants' equity of redemption as of June, 1978. Wornat, as mortgagee, then acquired title to the Vermont real estate. In April, 1979, Wornat commenced a deficiency action for the full amount of the note in the Worcester Division of the District Court Department. The defendants filed an answer but failed to allege in this answer that the mortgage foreclosure satisfied, in whole or in part, the deficiency. After a number of continuances, the defendants did not appear for trial, and the trial judge issued a default judgment against them. The judge later issued an execution of that judgment in the full amount of the note, plus interest and costs, for a total of $127,190.49. Approximately three years later, Vakalis filed a motion to recall the execution and to vacate the default judgment, which the court allowed.

Prior to Vakalis's filing his motion to vacate the default judgment, Wornat commenced an action to reach and apply to the defendants' debt a portion of the proceeds awarded Vakalis in an unrelated action. In response, Vakalis filed an answer and a counterclaim alleging that Wornat had violated G.L. c. 93A, § 2, by seeking recovery of the full amount of the note after Wornat had obtained title to the Vermont real estate.

Wornat obtained a restraining order and later a preliminary injunction enjoining Vakalis from receiving $163,324.90 of the proceeds from the unrelated action. Vakalis appealed the allowance of the preliminary injunction to a single justice of the Appeals Court who, initially and on reconsideration, affirmed the order.

The deficiency action and the reach and apply action were consolidated for trial. Vakalis filed numerous pretrial motions in these actions. The memoranda in support of these motions advance essentially two arguments: that Wornat's failure to give Vakalis notice under G.L. c. 244, § 17B, of its intent to foreclose and seek a deficiency bars a later deficiency action; and that Wornat's failure to determine the amount of the deficiency at the Vermont strict foreclosure proceeding extinguishes Vakalis's entire obligation. In addressing Vakalis's motion for summary judgment, the motion judge rejected both of these arguments. Subsequently, a judge in the Superior Court ordered that Wornat's case in chief be tried separately from Vakalis's counterclaim. The parties then proceeded to trial on the stipulation that the sole issue for the jury would be the fair market value of the Vermont real estate on the date Wornat obtained title pursuant to strict foreclosure. The jury found that the real estate was worth $68,150 at that time. Based on a formula stated in the pretrial stipulation, this verdict resulted in a judgment of $164,414.12, which included $59,548.36 in attorney's fees. In the separate trial of Vakalis's G.L. c. 93A counterclaim, the judge allowed Wornat's motion for a directed verdict at the conclusion of Vakalis's opening statement.

After the trials, Vakalis renewed his motion for the trial judge to recuse himself, and filed motions for a mistrial and for a new trial. These motions were based primarily on allegations of bias and misconduct on the part of the Superior Court judge. The judge denied these motions. Vakalis appealed the judgments to the Appeals Court, and we allowed Wornat's application for direct appellate review.

1. Applicability of G.L. c. 244, § 17B. Vakalis asserts that Wornat must comply with the notice requirement of G.L. c. 244, § 17B, ⁵ order to bring a deficiency action subsequent to a strict foreclosure proceeding in Vermont. Vermont law does not require a mortgagee to give notice of intent to seek a future deficiency prior to a strict foreclosure proceeding, United Sav. Bank v. Barber, 135 Vt. 278, 281, 375 A.2d 993 (1977), and Vakalis does not contend otherwise. Assuming that Massachusetts law governs, we conclude that G.L. c. 244, § 17B, does not apply to a foreclosure proceeding, such as this one, which does not involve a power of sale.

Section 17B on its face applies only to foreclosures under a power of sale. The text of § 17B states that, unless a mortgagee "before the date of the sale under the power in the mortgage" notifies the mortgagor of his or her intention to foreclose, and warns the mortgagor of the potential deficiency, the mortgagee may not bring a deficiency action "after a foreclosure sale." G.L. c. 244, § 17B. The form of the notice appended to the section also states "[y]ou are hereby notified, in accordance with the statute, of my intention ... to foreclose by sale under power of sale for breach of condition, the mortgage held by me...." The section thus expressly applies only when a foreclosure sale occurs pursuant to a power of sale in the mortgage.

Vakalis, however, argues that § 17B should apply to all foreclosures and that we should construe the statute accordingly. We do not agree. The distinction the Legislature preserved between mortgages foreclosed under a power of sale and those foreclosed by some other method is a rational one. In Massachusetts, two primary foreclosure methods exist: foreclosure under a power of sale, G.L. c. 244, §§ 11-17, and foreclosure by entry and possession, G.L. c. 244, §§ 1, 2. Beaton v. Land Court, 367 Mass. 385, 393, 326 N.E.2d 302 appeal dismissed, 423 U.S. 806, 96 S.Ct. 16, 46 L.Ed.2d 27 (1975). In a foreclosure under a power of sale, the mortgagee is empowered to sell the property at a foreclosure sale and to apply the proceeds to the mortgagor's debt. Notice of the mortgagee's intention to foreclose, and of the possibility that the sale may not extinguish the full amount of the mortgagor's debt, allows the mortgagor to attend the foreclosure sale and to bid or take other action to improve the sale price, and thus eliminate or reduce any deficiency. See Palumbo v. Audette, 323 Mass. 559, 560, 83 N.E.2d 549 (1949). Notice under § 17B therefore enables mortgagors to "look out for their interests at the foreclosure sale." Id. Because § 17B notice allows a mortgagor to protect against a deficiency, failure to give § 17B notice prevents a mortgagee from seeking further recovery in a later deficiency action. Guempel v. Great Am. Ins. Co., 11 Mass.App.Ct. 845, 851, 420 N.E.2d 353 (1981). See Boston v. Gordon, 342 Mass. 586, 593, 175 N.E.2d 377 (1961).

In contrast, in a foreclosure by entry and possession, and in the Vermont strict foreclosure proceedings which Wornat used in this case, a sale, which requires this form of notice protection, does not take place. In Massachusetts, a mortgagee who makes a peaceable entry, records a certificate of entry, and retains possession for three years, extinguishes the mortgagor'ss right of redemption. G.L. c. 244, §§ 1, 2. In Vermont, possession for the requisite period after a judicial decree of foreclosure and recording of the judgment similarly extinguishes the mortgagor's right of redemption. Vt.St.Ann.tit. 12, §§ 4526-4530 (1973). If the value of the property the mortgagee obtains by entry and possession is not sufficient to satisfy the entire debt, the mortgagee must later bring a deficiency action to recover the difference. Boston v. Gordon, supra at 593, 175 N.E.2d 377. Draper v. Mann, 117 Mass. 439, 441 (1875). Morse v. Merritt, 110 Mass. 458, 460 (1872), S.C., 113 Mass. 271 (1873). Hewey v. Richards, 116 Vt. 547, 550-551, 80 A.2d 541 (1951). By presenting evidence as to the value of the foreclosed property at the trial of the deficiency action, a mortgagor can protect against or limit a deficiency. Presenting evidence at a deficiency action thus protects a mortgagor in much the same way as attending a foreclosure sale. In the deficiency action Vakalis was able to present evidence, contest Wornat's claimed deficiency, and establish the value of the Vermont real estate. Vakalis had a suitable opportunity to protect against a deficiency in this case.

Vakalis argues that mortgagors will be unaware of foreclosures if we do not expand the notice requirements of § 17B. He fails to consider that the recorded certificate of entry required by G.L. c. 244, §§ 1, 2, is ample notice of the mortgagee's intent to foreclose by entry and possession. Beaton, supra 367 Mass. at 393, 326 N.E.2d 302. Vermont procedures also require notification of a strict foreclosure. Vt.St.Ann.tit. 12, § 4523(b) (1973)....