Daily Development for Monday, February 12, 2000

MORTGAGES; DUTIES OF MORTGAGEE: Party who executes mortgage, even though he does not execute note, is under duty to mortgagee to avoid transferring property so as to effect a release of the mortgage, and will be required to apply any proceeds realized from such transfer against the mortgage.

Bardwell v. White, 762 So.2d 778 (Miss.App. 2000).

Bardwell and Johnson were joint venturers in a timber operation. In one of their transactions, Bardwell identified a likely parcel for timber harvesting, and Johnson arranged for financing. Bank loaned the money for the acquisition of the property, which Bardwell and Johnson acquired as tenants in common. Both Bardwell and Johnson signed this mortgage, but only Johnson executed the promissory note. The court does not say why this occurred, and rejects Bardwell's speculation that it had something to do with bad blood between the bank and Bardwell.

Johnson supervised the harvest of the timber and paid a substantial amount of the proceeds on the mortgage. Johnson then arranged for a sale of the underlying real estate for a price that would have retired the balance of the mortgage. In connection with this proposed sale, the bank executed a release of the mortgage. This release was recorded, but at the last minute the sale fell through. The bank was unaware of the release.

Thereafter, Bardwell discovered that the property had not been sold, and the mortgage debt was still outstanding, but that the release of the mortgage had been recorded. He thereupon proceeded to sell his undivided interest in the property to a third party. This third party had no knowledge of the circumstances leading to the release of the mortgage, and by his taking he cut off the mortgage on the property as a bona fide purchaser for value under the recording acts.

The bank brought suit against Bardwell for the proceeds of this sale, to the extent that they did not exceed the balance owing on the mortgage, and froze an account in its possession that contained $7500 of those proceeds. Bardwell made numerous arguments resisting the bank's claim including some arguments that related to his relationship with Johnson. He argued that the fact that he was not a signor of the mortgage placed him in a special status vis a vis Johnson, who was. The lower court had found that Johnson and Bardwell were coventurers and that Johnson had implied authority to bind Bardwell to the mortgage debt.

On appeal, however, the Mississippi court of appeals found that the Bardwell/Johnson relationship was irrelevant, as was the question of whether Bardwell was personally liable on the note. The only relevant concern was the duty of a mortgagor to a mortgagee concerning the continued validity of the lien of the mortgage on the property.

The court here concluded, along with the lower court, that as a mortgagor, Bardwell owed to the bank a duty of good faith and fair dealing to see to it that the proceeds of the sale of the mortgaged property would be applied to the mortgage debt Here is the court's language:

"The court found that the premature cancellation of the deed of trust [could be relied upon by the third party], but did not serve as notice to Bardwell that the effects of the lien were extinguished since he was a direct party to the transaction creating the lien on property and had intended to give [Bank] a lien on the property in the first instance and then executed a warranty deed conveying his interest thereby intending to divest himself of ownership of the property in conjunction with the cancellation of the deed of trust. The court found that Bardwell could not claim the benefits of owning the property at the sale of his undivided interest without accounting to Citizens Bank for his prior legal actions encumbering the property. Good faith and fair dealing required no less. The deed of trust canceled by mistake could have been reinstated by proper action, subject to the ramification of intervening interests of innocent third parties."

Comment: What the editor finds interesting here is what the court did not say, and which it would almost certainly have said had the facts been there. The court did not say that Bardwell knew that the release had been executed mistakenly, and that the bank in fact still believed itself to be secured. If those were the facts, and the court viewed the record as supporting those facts, then the editor has no quarrel with the result. A typical mortgagee includes a covenant of future assurances, and one would assume it would cover the mortgagor selling the mortgage out to a bona fide purchaser.

But if Bardwell in fact believed in good faith that the mortgage had been released, perhaps because he thought Johnson had paid the mortgage, then Bardwell did nothing intrinsically wrong in selling the property, and the question is simply one of unjust enrichment. The editor can see where the court is coming from, but it's a closer call. Perhaps, if Bardwell had known of the mortgage, he might not have sold his interest at all, but would have conducted his affairs quite differently. He wasn't responsible for the misrecording of the release, after all.

Again, however, if Bardwell had some reliance argument, probably he should have raised it below, so maybe there were no such facts. If that is the case, then the court probably is on the right track. The situation is no different than an equitable lien attaching to casualty insurance proceeds or eminent domain proceeds or, in the proper case, to surplus proceeds paid to a mortgagor upon freclosure of a senior mortgage. There is authority that in each case euity will protect the mortgagee that lost its security.

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