Daily Development for Friday, August 11, 2000

By: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri
randolphp@umkc.edu

MORTGAGES; FORECLOSURE; MERGER: Where, in the course of judicial foreclosure proceedings, a third party obtains both the mortgagee's and mortgagor's interest, that party may avoid merger and proceed with the foreclosure to eliminate a known subordinate lessee where it is apparent from the documents surrounding the transactions that the parties did not intend merger.

Miller v. Martineau, 983 P.2d 1107 (Utah App. 1999).

A mortgagee brought a judicial foreclosure proceeding. Default judgment was entered against the lessee. Prior to completion of the foreclosure, the mortgagee assigned its interest in the deed of trust to a purchaser and the purchaser took a special warranty deed from the mortgagor. The lessee obtained a temporary restraining order enjoining the foreclosure sale. The Utah Court of Appeals held that the fee interest and mortgage lien did not merge in the purchaser so as to discharge the mortgage, and the lessee was not an intended thirdparty beneficiary of agreements between the purchaser and the mortgagee. The doctrine of merger does not apply if there are other intervening encumbrances on a property.

Comment: The case is consistent with a recent DIRT discussion that made the point that equity often avoids merger here even when the party obtaining the two interests is fully aware of the intervening lien.

The legitimate expectations of the intervening lienholder are not affected by the preservation of the two interests as separate, since the lienholder can still redeem by paying off the foreclosing senior lien, the same as before that lien passed into the same ownership as the property itself.

Although the original mortgagor probably could not foreclose away the junior lien in this fashion (by obtaining the senior mortgagee's interest), the current holder of the mortgagor's interest in our case has no personal obligations to the junior, and owes only the right to honor a redemption of the senior lien.

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