Daily Development for
Monday, August 24, 1998

by: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri

MORTGAGES; FORECLOSURE; OMITTED PARTIES: Easement holder not named in judicial foreclosure action remains unaffected by foreclosure, but is subject to reforeclosure, but confusion reigns as to the nature of the redemption right.

Diamond Benefits Life Ins. Co. v. Troll, 1998 WL 476512 (Cal. App. 8/17/98).

At an earlier time, Troll's neighbor had the misfortune to have completed its golf course by inadvertantly constructing two of its holes on Troll's property. This resulted in a lengthy negotiation through which Troll (not surprisingly) was able to exact a generous settlement. Troll transferred title to the golf course, but retained an elaborate set of easements for access, use, and even for development of portions of the property. Although the court, and apparently Troll, characterized the easements in question as relating only to certain portions of the golf course, property, the right of use of the golf course for Troll and his licensees extended apparently to the whole course. Troll recorded his easements.

At the time of Troll's recording, the golf course was subject to a recorded deed of trust. Later Diamond foreclosed this deed of trust in a judicial action, but failed to name or serve Troll. Later Troll sued to quiet title. The lower court concluded that the effect of the foreclosure was to leave Troll's easement in place, but subject to a right in the right of Diamond - the successful bidder - to reforeclose. The court, however, concluded that Troll had ninety days to exercise his equity of redemption in the property or his right would be lost.

Both sides appealed. The appeals court upheld that aspect of the opinon recognizing that the foreclosure did not eliminate Troll's interest, and further held that Diamond had a right to reforeclose Troll. In a somewhat obscure final entry, however, the court appeared to state that Troll had a one year equitable right of redemption under a California statute providing for statutory redemption. The court did admit, however, that Diamond had not briefed this issue, and perhaps this explains the confusion in the opinion.

Troll then argued that he was entitled to a pro rata right of redemption. There is authority for this argument, the court noted, but concluded that the better rule is that an omitted lienholder must redeem the entire mortgage debt in order to avoid foreclosure.

Comment 1: On the issue of easement's survival of the foreclosure, the court was on solid ground. Although few cases have addressed the impact of a foreclosure sale on an unnamed junior easement holder, there are numerous analogous cases involving other unnamed junior parties. The court rests its conclusion on an interpretation of the California statute requiring that persons holding "conveyances" from the mortgagor be named as parties. But it could also have rested the decision on Constitutional grounds. An easement is an interest in property which cannot be taken by state action without Due Process. This usually means service of process in a judicial proceeding.

Comment 2: On the pro rata right of redemption issue, the court is also on target. In this case, particularly, some of the easement rights extended apparently to the whole property that was subject to the mortgage. But even if that were not the case, the better rule would be to protect the senior mortgagee's interest by requiring that the easement holder redeem completely. The mortgagee was entitled to the entire property as security, and there is no justification in giving a junior party any special protection that dilutes the value of that security.

Comment 3: The court goes very seriously wrong, however, in that part of the opinion dealing with the period allowed for redemption. The trial court seemed to understand what it was doing, although the appeals court understands it so little that it doesn't really describe the proceeds below fully for us to make a clear judgment. The trial court most likely exercised its equitable discretion as part of the quiet title action to grant the mortgagee a right to strict foreclosure - an alternative remedy to foreclosure by sale available in equitable proceedings. Under a strict foreclosure, the party subject to the mortgage is given an "equitable" period of time during which to exercise the equity of redemption. If there is no such exercise, the equity of redemption ends. Because a strict foreclosure is strictly an equitable proceeding, and not a statutory foreclosure, and does not involve foreclosure by sale, most courts have held that the statutory right of redemption does not apply to such foreclosures.

The California Court of Appeals here appears to confuse completely the distinction between the equity of redemption, which it claims it is protecting, and the statutory right of redemption, which it cites as authority requiring that the lower court grant a one year redemption period. The statutory redemption period would only apply if the court had ordered a foreclosure by sale, which apparently it did not. It has been quite common for courts to "borrow" from the statutory redemption provisions to set the period for strict foreclosure, but it certainly is not mandatory and it is vital that the courts keep the two terms distinct.

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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