Call v. Jeremiah

425 P.2d 502, 246 Or. 568, 1967 Ore. LEXIS 620

• Court: Oregon Supreme Court
• Decided: March 22, 1967
• Status: Published

Opinions

O’CONNELL, J.

This suit was brought to foreclose a second mortgage after the first mortgage was foreclosed and the land was redeemed from the foreclosure sale by the grantees of the mortgagors. Plaintiffs appeal from a decree in favor of defendants. The facts are as follows :

(1) On February 2, 1960, Duane and Patricia Mae Jeremiah executed a first mortgage to Pacific Mutual Life Insurance Company.

(2) On February 3, 1960, the Jeremiahs executed a second mortgage to plaintiffs, Albert and Eudora Call.

(3) On April 6, 1961, the Jeremiahs executed a deed to Mercer Steel Company.

(4) On March 21, 1962, Pacific Mutual Life Insurance Company brought suit against the Jeremiahs to foreclose the first mortgage. Albert and Eudora Call were joined as parties defendant but defaulted.

(5) On July 27, 1962, the decree of foreclosure was entered.

(6) On September 10, 1962, Pacific Mutual Life Insurance Company purchased at the foreclosure sale.

(7) On August 27, 1963, Mercer Steel Company executed a quitclaim deed to Robert and Patricia Blake.

(8) On August 27,1963, Robert and Patricia Blake executed a quitclaim deed to Earl and Ethel Lawhead.

(9) On September 9, 1963, the Lawheads redeemed the property from the foreclosure sale.

(10) On December 9,1963, the trustee in bankruptcy of the Jeremiahs executed a quitclaim deed to the Lawheads.

(11) On December 9,1963, Earl and Ethel Lawhead executed a mortgage to Security Bank of Oregon.

(12) On May 25, 1964, the Calls brought the present suit to foreclose the second mortgage.

Plaintiffs in the present suit were joined as defendants in the foreclosure suit brought by Pacific Mutual Life Insurance Company, the first mortgagee. In the first foreclosure suit the decree provided that “the defendants above named, and each of them, and all persons claiming by, through or under them, or any of them, be forever barred and foreclosed of all right, title, interest, lien or equity in or to said real property and each and every portion thereof, except their statutory right of redemption.”

Defendants, the grantees of the mortgagors, contend that since the decree expressly forecloses plaintiffs’ mortgage interest in the property, the second mortgage is extinguished and plaintiffs’ only remaining interest is a personal claim against the mortgagors for the payment of the loan.

Plaintiffs, on the other hand, contend that a second mortgage may be foreclosed after the foreclosure of a first mortgage, if the property is redeemed from the foreclosure sale by the mortgagor or his grantee.

Ulrich v. Lincoln Realty Co., 180 Or 380, 168 P2d 582, 175 P2d 149 (1947), clearly establishes that a decree of foreclosure extinguishes a first mortgage and that when the land is redeemed by the mortgagor or his grantee the mortgage is not revived as to any deficiency on the foreclosure sale. The first mortgagee has, of course, the lien of a docketed judgment for the deficiency, but this lien dates from the docketing of the judgment and does not have its source in the mortgage which is extinguished by the foreclosure decree.

In spite of the holding in Ulrich, plaintiffs argue that the foreclosure decree does not have the same effect upon a second mortgage, even where the language of the decree expressly forecloses that mortgage lien. They argue that they “were not actual adversaries in the prior proceeding” in relation to the present defendants and, therefore, are not bound by the judgment. Put in a different way, they argue that the mortgage sought to be foreclosed in the present suit was not the same claim, demand or cause of action presented in the prior mortgage foreclosure proceeding.

Plaintiffs misconceive the purpose of foreclosure proceedings and the effect of the foreclosure decree. The effect of the foreclosure decree is not simply to extinguish the interest of the mortgagee bringing the suit- — it is designed to extinguish all interests which are subordinate to the foreclosing mortgagee’s interest. This result is clearly pronounced in the decree itself. If a second mortgagee or other junior encumbrancer wishes to assert that his lien is prior to that of the plaintiff, or if he wants to obtain a deficiency judgment in the foreclosure proceedings rather than through a separate action on the debt, he is free to do so. But if he elects not to raise these or other questions, the decree will extinguish his mortgage lien.

If, as contended by plaintiffs, junior liens are not cut off by the decree during the redemption period, it would seem to follow that we have developed a system whereby the second mortgagee who “has been joined” in the first mortgagee’s suit to foreclose can bring a second suit to foreclose during the redemption period and a third mortgagee can bring a third suit to foreclose, and so on with other inferior lien claimants, as a consequence of which there is a multiplicity of litigation which serves no purpose that cannot be served in the original foreclosure suit. When one adds to this the fact that the junior encumbrancers have a right to bid in at the sale of the prior mortgage and also have a statutory right to redeem after sale, it should be apparent that no such system of litigation was contemplated for the foreclosure of mortgages.

This effect of the decree is explained in the various treatises on mortgages. Thus, in 2 Wiltsie, Mortgage Foreclosure, §835 at pp. 1355-56 (5th ed 1939), the author says: “Where a subsequent mortgagee or lienor is made a party to the action or proceeding for the foreclosure of a prior mortgage, the judgment or decree therein destroys his lien, and upon the expiration of the time for redemption the purchaser is entitled to the property free from the lien. The subsequent mortgagee or lienor is remitted to the fund realized in the foreclosure proceedings above that required to satisfy all proper prior charges.”

① Our own cases express the same idea.②

Wiltsie’s statement that “upon the expiration of the time for redemption the purchaser is entitled to the property free from his lien” is intended to explain that the purchaser takes the land at the end of the redemption period and that when he does the land is free from the lien. Wiltsie’s preceding statement that the decree “destroys the lien” is unqualified, which means that the lien is destroyed not only as to the purchaser but as to all others unless the destroyed lien is brought back to life, which is another matter involving the policy behind the redemption statutes and the desirability of reviving liens which are destroyed by a foreclosure decree.③

■ Several arguments have been advanced for the revival of mortgage liens upon redemption by the mortgagor or his grantee.④ In the face of these arguments, the Ulrich case decided at least that a first mortgage lien is not revived. To reach a contrary result in the case of a second mortgage, it would be necessary to explain why a second mortgage lien revives when it is clear that a first mortgage lien does not. It would seem that the first mortgagee would have a stronger argument for the revival of his lien to satisfy the deficiency on the debt owing to him than would the second mortgagee who bargained only for a lien interest subordinate to the first mortgage. To allow revival of the second mortgage in this situation would be tantamount to holding it superior to the first mortgage to the extent of the deficiency.

It is argued that the grantee of the mortgagor can get no more than the mortgagor had and thus must take the land burdened by the mortgage.⑤ Accepting the argument that the grantee can get only that which the mortgagor had, the grantee would take free of the first mortgage as held in the Ulrich case. That being so, it is difficult to see why he should not also take free of the second mortgage.

The reasons for not permitting the revival of liens subjected to foreclosure is summarized in a note by William F. Bernard in 27 Or L Bev 139 at 141-42 (1948):

“The advocates for the view that the proceeding of foreclosure and sale extinguishes the mortgage lien have advanced the following arguments. It has been noted that the purpose of the redemption statutes of helping the mortgagor is thwarted rather than promoted where, under the revival theory, the possibility of successive resales is imminent. Also, it has been contended that the main purpose of making it to the mortgagee’s interest to bid np to the fair value of the property is defeated where revival of the mortgage lien is recognized. Considering the position of the mortgagee further, the point has been emphasized that holding the lien extinguished by foreclosure and sale does not unduly burden the mortgagee because he has ample opportunity to protect himself by bidding up to the fair value of the property. In addition, we have been reminded that, notwithstanding the extinguishment of the mortgage lien, redeemed property in the hands of the mortgagor would be subject to a judgment lien for any personal deficiency judgment rendered in favor of the mortgagee. And one final argument should be noted. In those jurisdictions where the revival theory is expounded, the redemption statute usually states that upon redemption the sale is ‘annulled’ or ‘vacated,’ and such language is heavily relied upon in explaining the result reached. It has been contended that the presence of these terms does not compel the conclusion that the lien is revived upon redemption. A fortiori it may be argued that, where no language of ‘annulment’ is found in the statute, the view that the mortgage lien is extinguished upon foreclosure and sale is supportable.”

The reasons for not permitting the revival of mortgage liens upon redemption are more specifically developed by Durfee and Doddridge, Redemption From Foreclosure Sale — The Uniform Mortgage Act, 23 Mich L Rev 825 (1925). There, the authors observe that the rejection of the rule of revival is not unfair to lienors “for they cannot reasonably have expected * * * any more than the proceeds of a single sale of the property.” It is further pointed out that “the restoration of liens is a trap for the unwary” because “the redemptioner commonly, and we think not unreasonably, makes his redemption in the belief that the statute has conferred upon him the privilege of buying out the purchaser, not a mere privilege of paying money for the advancement of others.”⑥

In addition to their statutory right of redemption from the foreclosure sale, junior lienors have the opportunity to bid in at the foreclosure sale and “if the property is worth more than the amount of the senior lien, it is desirable to put some pressure upon the junior lienors to bid the property beyond the amount of the senior lien.”⑦ As was pointed out in Willis v. Miller, 23 Or 352, 362, 31 P 827 (1893):

“The foreclosure and sale is intended to cut off all subsequent incumbrancers that are made parties, so that to protect themselves they must bid on the property or suffer the consequences of the ex-tinguishment of their liens, as the object of the sale is to dispose of the property to the highest bidder; and this consequence to the later incumbrancer is calculated to promote a healthy competition and make the property bring its full value.”

Similarly, the court in Higgs v. McDuffie, 81 Or 256, 272-73, 157 P 794, 158 P 953, 955 (1916), had occasion to give careful scrutiny to the nature of the foreclosure decree. In explaining the effect of the decree, the court said:

“* * * [T]he true doctrine is that upon foreclosure the court seizes upon the title affected by the mortgage, divests it of that lien, and also of all subsequent claims, as well as the equity of redemption named in the statute, and offers the pledged estate, thus shorn of incumbrances, for sale for the purpose of creating a fund to satisfy the various demands against it. The decree puts a quietus upon the equity of redemption and all subsequent liens. Claimants, including the erstwhile holder of the equity of redemption, must then and afterwards look to the fund and not to the land for satisfaction.” (Emphasis added.)⑧

Durfee and Doddridge, supra, conclude that it is “better to hold all liens extinguished than to hold all, or any, revived. The pressure applied to junior lienors is desirable and the hardship on them is by no means shocking.” They add, “We cannot make of the land a miraculous pitcher, and the attempt to do so will merely discourage redemption, encourage underbidding and defeat the purpose of the statute.”⑨

However, even if it is conceded that redemption by the mortgagor will revive pre-existing junior mortgage liens, it does not follow that redemption by the mortgagor’s grantee will also revive such liens. As explained in 2 Glenn, Mortgages, § 234, pp. 1110-1111 (1943): “There is * * * a vital difference between mortgagor and grantee, as to statutory redemption in its effect upon junior liens.” Even assuming that a junior lien would revive Avhere the mortgagor redeems, Glenn says:

“* * * But when the grantee redeems, there is no revival of junior liens, except those that he himself had created after he acquired title. The liens which the mortgagor created prior to his deed do not revive when the grantee redeems, for the reason that they are not his debts, and he cannot be considered as standing in the mortgagor’s shoes merely because he has exercised the statutory right of redemption.”

The correct analysis of the problem is found in Moody v. Funk, 82 Iowa 1, 4, 47 NW 1008, 1009 (1891). In that case the court said:

“* * * [T]here is a marked difference between the case of a redemption by the judgment debtor [who was a mortgagor] and that of a redemption by his grantee. It is the policy of the law to secure to the debtor, as nearly as is practicable, the full value of his property sold on execution. If the execution creditor fail to bid for the land sold a just amount, the debtor should be permitted to transfer his interest to another for a fair consideration; and, if his grantee redeem, the execution creditor has no right to complain, for ■ he might have bid for the land a larger sum. Nor is a junior lienholder prejudiced by such a transfer. It does not affect his right to redeem within the time given him by law, and, if he is not Avilling to give more for the land than the amount for which it was sold, he should not prevent the debtor from realizing what he can for his property. Where the debtor redeems, and thus restores to Ms estate land subject to execution for other debts, there is more ground for holding that it may again be sold to satisfy the remainder of the unpaid judgment. But, however that may be, we are of the opinion that the grantee of the execution debtor, who, as in this case, acquires the interest of his grantor after the right of a junior lienholder to redeem is barred by lapse of time, may redeem without removing such bar, and thus perfect in himself the title to the land sold.”

This same rationale for a distinction between redemption by the mortgagor and redemption by the grantee of the mortgagor was further elaborated in Cooper v. Maurer, 122 Iowa 321, 326, 98 NW 124, 126 (1904), where the court said:

“* * * If the property is more than sufficient to pay the mortgage debt, the junior lienholder has it in his power to protect himself either by bidding at the sale or by exercising his right of redemption. If he is unwilling to do this, he has no right to complain if some other person, believing there is a margin of profit in the property, takes a conveyance of the remaining equity or right of the debtor, and by redeeming from the sale gets a title purged of the lien of which the creditor has refused to avail himself in the time or manner prescribed by law.”

Plaintiffs rely upon Flanders v. Aumack, 32 Or 19, 51 P 447, 67 Am St Rep 504 (1897). That case did not involve the rights arising out of a mortgage transaction. The sole question was whether a judgment lien was extingiushed when the grantee of the judgment debtor redeemed the land from the execution sale. The court was careful to point out the distinction between a mortgage lien and a judgment lien with respect to the effect of redemption by the grantee of the debtor. The court said:

“* * * A mortgage is a specific lien, which attaches by virtue of the contract of the parties concerned; but the lien of a judgment is general, and attaches by operation of law, as a sequence of its rendition. Foreclosure is a remedy by which the property covered by the mortgage may be subjected to sale for the payment of the demand for which the mortgage stands as security, and, when the decree is had and the property sold to satisfy it, the mortgagee has obtained all he contracted for; but, if there is also a personal decree against the mortgage debtor, this becomes, from the date of its docketing, a general lien upon his real property, as in ease of a judgment; and, if a deficiency remains after the application of the proceeds of the sale of the lands covered by the mortgage, the decree may be enforced by execution, as in ordinary cases: Hill’s Ann. Laws, § 417, subd. 2. The resale does not take place under the order for the sale of the specific property covered by the mortgage lien, for that has been exhausted, but under the personal decree which remains as a deficiency decree against the mortgage debtor after the application of the proceeds arising under the order of sale; and a redemption will not reinstate the specific mortgage lien, while it will the general lien acquired by the personal decree. This distinction is clear, and is bottomed both upon principle and authority. The redemption is from the sale, and not from the mortgage; and if the lien of the personal decree has never attached, by reason of the mortgagor not having the fee of the property at the time it was rendered, there never existed any lien to be reinstated against his successor in interest, who purchased prior to the decree.”

In the present case we are concerned with two specific mortgage liens, both of which were cut off by the foreclosure decree. There was no general lien created by a docketed judgment prior to the transfer of the mortgagors’ interest to their grantee. When there is an execution sale to satisfy a judgment, there is no judicial declaration, as there is in the case of a foreclosure decree, cutting off the lien. The general judgment lien, not being terminated by a decree or by the sale, continues to encumber the property during the redemption period and a grantee of the debtor takes subject to the encumbrance. However, as we have already noted, the specific lien of the mortgage is terminated by the foreclosure decree and therefore the mortgagor’s grantee takes free of the foreclosed mortgage lien.⑩

It is contended that our decision today overrules Flanders v. Aumack, supra, as well as the later decisions in Kaston v. Storey, 47 Or 150, 80 P 217 (1905) and Jacobson v. Lassas, 49 Or 470, 90 P 904 (1907). We do not consider our opinion to have this effect.

As pointed out previously, the Flanders case held only that a judgment lien was revived upon redemption ; it was not concerned with mortgage liens. In so limiting its opinion, the court maintained a position consistent with Willis v. Miller, 23 Or 352, 31 P 827 (1893), which held that a mortgage lien is not revived by redemption as to a deficiency. This is not the only time that the court has attempted to avoid the mistake of equating mortgage liens with judgment liens. Thus, in Higgs v. McDuffie, 81 Or 256, 272, 157 P 794, 158 P 953 (1916), the court said:

“* * * This leaves out of the calculation the effect given to the decree by the statute [in the mortgage situation], namely, barring the equity of redemption, while a judgment at law does not bar the title but only operates as a lien upon it. In equity the previous title is extinguished by the decree, while at law [that is, in the case of a judgment lien] the title does not pass until delivery of the sheriff’s deed.”

It is further contended that the decision in Flanders is inimical to the distinction between redemption by the mortgagor and redemption by the grantee of the mortgagor. Sole reliance is placed upon the language of the court that “upon principle, it is difficult to see wherein the rights of a successor in interest redeeming are to be distinguished from those of the judgment debtor himself.” 32 Or at 25. This is certainly true where, as in Flanders, the judgment lien for the deficiency has attached prior to the conveyance by the judgment debtor. But this is not applicable to a case, such as the one before us, where the decree cutting off the mortgage lien intervenes between the conveyance by the mortgagor and the redemption by the grantee. Thus, at the time the judgment lien for the deficiency would have attached, the mortgagor no longer held the property. Under these circumstances, Ave do not find the same reasons for holding that the grantee takes the land subject to the debt of his predecessor.

Turning noAV to Kaston v. Storey, supra, we may note once again that to hold that a judgment lien is revived for purposes of a deficiency does not neeessitate or even indicate a similar holding with respect to a mortgage lien. The crux of the distinction between Kaston and the present case, however, is that in the former case the judgment creditor was not joined as a party defendant in the proceeding to foreclose the prior lien. Here the junior encumbrancer was joined in the suit to foreclose the first mortgage, and having failed to appear, stands in a different position from one who was never given notice and, consequently, never given an opportunity to appear.⑪

A similar distinction explains the decision of this court in Jacobson v. Lassas, supra, where the second mortgage had been declared invalid prior to the institution of the suit to foreclose the senior mortgage. Thus, although the junior mortgagee was made a party to the first mortgagee’s foreclosure action, the previous determination of invalidity was regarded by the court as preventing him from appearing in the later action. It is because the junior mortgagee had no opportunity to appear, not because he failed to actually appear, that the court treated the case the same as if there was a failure to join a subsequent lien-holder. But where, as in the present ease, the junior encumbrancer has been given an opportunity to appear, he has been given everything to which the law entitles him. This same concept underlies the whole concept of default judgments; that a party is entitled only to an opportunity to appear and assert his claim.

In conclusion, then, where a junior encumbrancer is joined in an action by a senior mortgagor to foreclose the latter’s mortgage, the junior encumbrancer is required to assert his interest in that action. If he fails to do so, neither redemption by the mortgagor nor by the mortgagor’s grantee can revive the mortgage lien.

However, even if it be considered proper to hold the junior encumbrancer’s interest revived in the case of redemption by the mortgagor, his security should be held extinguished as to a redeeming grantee. Only in one of these two ways can the legislative protection afforded the mortgagor by redemption statutes be effectuated.

Judgment affirmed.

See also, 11 Glenn, Mortgages, § 86 at p. 510 (1943); Osborne, Mortgages, §'324 at pp. 944-45 (11951). Similarly, as was pointed out in Cowan v. Stoker, 100 Utah 377, 380, 115 P2d 153, 154 (1941):

“A junior mortgagee who is joined and properly served in an action by a senior mortgagee to foreclose his mortgage, whether or not he appears or pleads, is bound by the decree of foreclosure and may not thereafter assert a claim against said mortgaged property. * * * Upon foreclosure of the senior mortgage the lien of the junior mortgagee attaches to the surplus of the proceeds of the foreclosure sale.”

In Williams v. Wilson, 42 Or 299, 70 P 1031, 95 Am St Rep 745 (1902) the court asked: “Now, what is the status of a judgment lien creditor when he has been a party, regularly brought in, and becomes legally subject to the decree of foreclosure?” In answer, the court said: “If he desires to perpetuate his lien as it pertains to the particular property involved by the suit, it is plain he must set it up; otherwise he must stand in default, and can get nothing.”

Similarly, in Lutz v. Blackwell, 128 Or 39, 43, 273 P 705 (1929) the court said: “One who contends that he is possessed of a lien upon the property of another, and who is made a party defendant in a suit in which his lien is attacked, must set up his lien, otherwise he wiU be in default and can get nothing.”

See also, Bickel v. Wessinger, 58 Or 98, 104, 113 P 84 (1911), where the court said: “By the foreclosure suit Weinhard’s mortgage lien [the second mortgage] upon the property in question was extinguished on his default.”

The fact that some of our cases speak of the “title” remaining in the mortgagor until execution and delivery of the sheriff’s deed does not militate against the conclusion that the decree cuts off junior liens. Statements that the mortgagor retains “title” is a way of saying that he has a right of redemption. The redemption statutes (ORS 23.600) provide that upon redemption the mortgagor is “restored to his estate.” It would seem unnecessary to so provide if “title” remains in the mortgagor during the redemption period.

See Durfee and Doddridge, Redemption from Foreclosure Sale — The Uniform Mortgage Act, 23 Mich L Rev 825, 850-53 (1925), stating the argument in favor of revival but then going on to show that revival is inconsistent with the purpose of redemption statutes.

See Flanders v. Aumack, 32 Or 19, 25, 51 P 447, 67 Am St Rep 504 (1897), and Durfee and Doddridge, supra note 3 at 856, n. 81.

Durfee and Doddridge, supra note 3 at 852.

Durfee and Doddridge, supra note 3 at 852-53.

The dissent places considerable reliance on DeRoberts v. Stiles, 24 Wash 611, 64 P 795 (1901) for the proposition that the decree of foreclosure and sheriff’s sale do not divest the mortgagor of his interest in the land, that there is no divestiture until a sheriff’s deed issues. For our purposes it is sufficient to point out that later Washington cases have often used language contradictory to that found in DeRoberts. For example, in McManus v. Morgan, 38 Wash 528, 80 P 786 (1905) the same court said:

“When appellant purchased the real property upon mortgage sale, he became entitled to the possession thereof. * ** * He thereby acquired all the title to the mortgaged property which the mortgagors had. This title could be defeated only by redemption, or another sale; but, until resale or redemption, the purchaser was for all purposes the owner.” 38 Wash at 532.

The statement from McManus v. Morgan, supra, is quoted with approval in Sandberg v. Murphy, 134 Wash 685, 688, 236 P 106 (1925).

It has further been suggested that the type of expression used in DeRoberts v. Stiles, supra, is against both the weight of Washington authority and common sense. See Schweppe, Interest Acquired by Purchaser at Foreclosure or Execution Sale, 5 Wash L Rev 105, 121, 125 (1930). With respect to the latter point, Dean Schweppe says, “It is suggested * * * that to hold that no title to real property passes at the sale is contrary to all commonly accepted notions of the legal effect of a sale.” Schweppe, supra, at 121.

Durfee and Doddridge, supra note 3 at 852153.

Moody v. Funk, 82 Iowa 1, 47 NW 1008 (1891), which holds that the grantee of the mortgagor may redeem free from the lien of a second mortgage, is referred to in the Flanders case as if it involved the general lien of a judgment rather than the specific lien of a mortgage. If the court’s reference to Moody v. Funk is to be taken as a disapproval of the holding in that case, the expression of disapproval would be a dictum since Moody dealt with a specific rather than a general lien. If Flanders is to be so construed, we repudiate the dictum.

It is the universal rule that the interest of an unjoined junior encumbrancer is not affected by the foreclosure decree. See Osborne, Mortgages, § 322 (1951); 2 Glenn, Mortgages, § 86 (1943).