Daily Development for Friday, August 25, 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; POWER OF SALE: Where private power of sale foreclosure fails to provide notice to contingent remainder interest holders, sale is void, and purchasers under power of sale must relinquish title subject to equitable lien for the price they paid, but lien will be reduced by damages for period of time that property was held by purchasers.

Williams v. Kimes, 2000 WL 1052163, No. SC 82151 (Mo. 8/01/200)

Aubra died and left his property to "Reba. and her bodily heirs." Missouri law interprets such an attempt to create a fee tail as a life estate with remainder to the bodily heirs. During the lifetime of the life tenant, the presumptive bodily heirs had a contingent remainder interest.

Reba and the executor of Aubra's estate borrowed money secured by a deed of trust on the property. The contingent remainder holders did not sign the deed of trust. (Presumably their interest was bound by the action of the executor.)

Later, during Reba's lifetime and her possession of the property, the debt went into default and the mortgagee foreclosed, notifying Reba but not those parties who at that time were her presumptive bodily heirs. The Kimes, with no knowledge of any defective notice problems, bought the property at the foreclosure sale and the bank's lien was released. Thereafter, Reba died.

In a prior expedition of this case through the Missouri courts, the Missouri Supreme Court held that the foreclosing lender had a duty under Missouri law to notify the presumptive bodily heirs of the foreclosure sale and that the sale was therefore void and the property had to be returned to the heirs. On remand, the lower court determined that this meant that the property passed to the heirs free of any lien, but that the deed of trust purchasers owed to the heirs damages in the form of rent for the period of time between Reba's death and the moment that they were restored to possession amounting to about $23,000.

On appeal: Held: Reversed in part and affirmed in part. The purchasers are entitled to a lien, but the damages judgment against them stands.

The lower courts had been of the view that the original deed of trust lien on the property belonged to the mortgagee, and, as the mortgagee was not a party to the proceedings, there was no justification in reinstating the lien. The Kime's claim for recoupment of their purchase price through the imposition of an equitable lien was deemed to be in effect the same thing, since the court appeared to be of the view that such recoupment was a matter between the Kimes and the mortgagee.

Here the Missouri Supreme Court, reversing that determination, held that the recoupment right appropriately lay against the property itself, whatever rights the Kimes had against the mortgagee. It noted that this was fair to the heirs, since the mortgagee's original release of its lien was predicated on the notion that it had a valid foreclosure, which it did not.

Although the court did not say so, one assumes that the limit of the recoupment lien would be the amount of the original lien, even if the foreclosure purchaser's payment had been higher. The heirs would not have received the benefit of the higher price, as an surplus would have been paid to or on account of Reba.

Under the facts of this case the Kimes, for some reason, waived any claim of interest on their recoupment claim. So the court does not discuss the obligation of the heirs to pay interest.

As to the $13,000 in rent, the court dismissed the appeal of the lower court's ruling on this point on procedural grounds. But it then goes on to conclude that the award of rent likely was equitable anyway. Even though the Kimes' had acted in good faith, they did enjoy a wrongful benefit from the use of the property. The amount was offset by improvements the Kimes made to the property during their control and for the value of crops left standing when the Kimes relinquished control. (Note that if the Kimes had asked for and received interest, this "equitable rent" claim would likely have been totally offset.)

Comment 1: It is important to note that all of this constitutes equitable precedent following a private power of sale foreclosure, and does not depend upon any statutory or due process notions associated with a judicial foreclosure.

Comment 2: The editor generally concurs in the case. The editor feels that the Kimes, if not the mortgagee, should have been entitled to collect interest on the recoupment amount, since they forfeited the use of the money just as the heirs forfeited the use of the land. The question is whether their claim lay against the mortgagee that wrongfully foreclosed or against the property. Certainly for the time after the heirs were restored to possession and continued to fight the recoupment lien, one would think that an interest payment was appropriate. For the period of time prior to that, perhaps, the Kimes sole remedy should be against the mortgagee, even though in some cases (perhaps not this one), a mortgagor would get the benefit of the money without the burden of the interest.

Readers are urged to respond, comment, and argue with the daily development or the editor's comments about it.

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