Daily Development for Thursday, March 5, 2001

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

Here are two foreclosure cases, neither enough to make a meal, but perhaps together we get a complete DD.

MORTGAGES; PRIORITIES; FORECLOSURE: Although junior mortgagees and other claimants agree that the other claimants will receive first proceeds of the sale of lots from a subdivision serving as security, such agreement will not affect the rights to payments upon foreclosure. Jones v. Era Brokers Consol., 6 P.3d 1129 (Ut. 2000).

Jones held a second deed of trust (subordinated purchase money) on property that was the subject of a proposed development. IRP performed certain work at the site until the owner failed to make payments and IRP stopped work. Approximately one month later, the parties (including Jones) entered into a "work out" construction agreement. The construction agreement provided that IRP would receive two developed lots as partial satisfaction of its outstanding claim and that IRP would be paid up to the balance of its claim by a pro rata division of proceeds "upon sale of each lot ... prior to any distribution to ... Jones."

The primary lienholder also agreed to withhold foreclosure for an identified period, but matters lingered on beyond that standstill period, and the primary lienholder foreclosed. IRP at that time still had an outstanding balanced owed to it.

At the non judicial foreclosure sale, there was a surplus amount from the proceeds following satisfaction of the primary lienholder's lien, a surplus amount was deposited with the clerk of the district court. Under Utah statutes, surplus from nonjudicial foreclosures are to be paid to "the parties entitled thereto," and Utah courts have interpreted this language to mean that the liens of junior lienholders follow the foreclosed land into the proceeds, so that they have first claim on the surplus.

IRP argued, however, that Jones' agreement with respect to priority for sale of lots was equally applicable whether the sale was in the ordinary course of business or through foreclosure. The trial court agreed. On appeal: held: Reversed.

The Utah Supreme Court held that the language giving IRP the right to first claim on the proceeds of any sale of the property was only applicable to sale in ordinary course of business. It pointed to a provision in the agreement that gave IRP a first option to purchase the primary lienholder's security interest prior to any foreclosure sale. The court concluded that the contract would not contain this language if the parties did not intend it as the sole alternative for IRP in the even of foreclosure. In its view, any other interpretation of the contract would make the option provision unnecessary.

The junior lienholder, therefore, was entitled to the proceeds.

Comment: The court's analysis stated that the interpretation of the contract must depend upon the language within the four corners of the instrument, and consequently it was a question of law, as to which no deference was owed to the parties. Other recent decisions in other jurisdictions have rejected this notion, and have preferred to look to all the facts and circumstances in interpreting documents in each case. Still others follow the "four corners" rule when the document is ambiguous, and otherwise take outside evidence.

In the editor's view, although the court's conclusion might have been correct, this instrument was complex and obscure, reflecting the complexity of the considerations of the parties in the construction workout, and it would have been appropriate to consider other evidence of the understanding of the parties. The court would still be looking for an objective standard in evaluating the meaning of the agreement, but why pretend that clarity of intent exists when it clearly does not?

If we assume that IRP had some form of mechanic's lien or other security interest in the property, then the right given to IRP to acquire the rights of the senior lienholder was relatively meaningless, since any junior lienholder has the right to pay off the lien of a threatening senior lien and to be subrogated to that lienholder's rights. It may be that the statement that IRP had "first option" to purchase that lien reflected some priority over the Jones' right to redeem the senior lien, but it did not create that right. It is quite possible, however, that none of the parties were aware of this subrogation right held by junior lienholders.

In any event, the editor certainly can imagine a reason that IRP might have wanted a right to redeem from the senior lien even though it expected to be paid any surplus from the senior foreclosure. Junior lienholders rarely exercise their right to redeem, but when they do it generally is to delay the foreclosure sale until some future time, which it is possible that the property will sell for a higher price. As IRP was still working on the property, it is possible that IRP could have improved its position by forestalling the prior lienholder's foreclosure, continuing work, and then marketing the lots after all of the work had been completed. Once the property passed at the foreclosure of the senior lien, it was likely that IRP would not have any rights to continue to work on it.

In short, it may very well be that the court was correct in reaching the conclusion that it did, but the editor would have preferred that the court take a broader look at the transaction before reaching this too easy conclusion.

MORTGAGES; FORECLOSURE; PROOF: Photocopy of note sufficient to allow foreclosure. Braut v. Tarabochia, 17 P.3d 1248 (Wash.Ct.App. 1 Div. 2001)

A photocopy of a promissory note passed muster under the best evidence rule as evidence of a debt, allowing the lender to foreclose the recorded mortgage, despite some serious question about whether or not the money was ever lent..

Braut claimed that the corporation of which he was president lent Tarabochia $30,000 in 1979. Although a mortgage was recorded at the time, the Tarabochias never made any payments, the corporation was dissolved, the Tarabochias got divorced, sold the house, and then one of them died. Only then did Braut step forward to foreclose on the mortgage.

The title insurer for the new owners, the Wierzbickis, filed a quiet title suit for them and judgment was entered removing the mortgage when Braut was unable to produce the note or any other evidence that he had made the loan.

Seven days after the judgment was entered, Braut asked the court to reopen the case based on what he claimed was a newly discovered photocopy of the note. The case went to trial. The surviving Tarabochia testified that he did not remember receiving the loan or signing the note.

He also said that Braut tried to bribe him $5,000 for testifying that the loan had occurred.

Braut marshaled his own facts: the recorded mortgage, plus testimony from a former FBI officer that there was a "strong indication" that the signatures were real and that the copy was not a cut and paste job.

The trial court accepted the photocopy as evidence of a debt. The note had a 12% interest rate, so with almost 20 years of unpaid interest, Braut got a judgment for almost $400,000, plus a judgment of foreclosure.

The Wierzbickis appealed. They argued that the trial court had not applied the best evidence rule and, under that rule, the photocopy failed because there was "a genuine question raised as to the authenticity of the original." The appeals court, however, affirmed the trial court. It rejected the Wierzbicki's argument that the note had to be proven by "clear, cogent and convincing" evidence, since its legitimacy was in doubt. It found Braut's own lack of memory about the loan not surprising, given the passage of time and the fact that he had been beat up in the intervening years.

The court also liked the professional tone of the FBI person's testimony.

Perhaps most importantly, the court said, "[t]he Wirzbickis do not explain why this mortgage would exist if the loan had not occurred." The court thus found the evidence of authenticity "tenable," if not "overwhelming."

Reporter's Comment: One can only wonder if the scales might have tipped the other way had the court not assumed that a title insurer was liable to the Wierzbickis for having "failed to discover "the Braut mortgage. (The reporter for this item The Title Insurance Law Newsletter, published by Woodridge Legal Publishers and edited by J.

Bushnell Nielsen.)

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

Items in the Daily Development section generally are extracted from the Quarterly Report on Developments in Real Estate Law, published by the ABA Section on Real Property, Probate & Trust Law. Subscriptions to the Quarterly Report are available to Section members only. The cost is nominal. For the last six years, these Reports have been collated, updated, indexed and bound into an Annual Survey of Developments in Real Estate Law, volumes 1‑6, published by the ABA Press. The Annual Survey volumes are available for sale to the public. For the Report or the Survey, contact Maria Tabor at the ABA. (312) 988 5590 or mtabor@staff.abanet.org

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