Licursi v. Sweeney

NOTICE:  This opinion is subject to motions for reargument under V.R.A.P. 40
as well as formal revision before publication in the Vermont Reports.
Readers are requested to notify the Reporter of Decisions, Vermont Supreme
Court, 111 State Street, Montpelier, Vermont 05602 of any errors in order
that corrections may be made before this opinion goes to press.


                                No. 89-277


Jane Licursi                                 Supreme Court

                                             On Appeal from
     v.                                      Lamoille Superior Court

David J. Sweeney                             November Term, 1989


Linda Levitt, J.

Harold B. Stevens, Stowe, for plaintiff-appellee

Goodrich & Rice, Montpelier, for defendant-appellant


PRESENT:  Allen, C.J., Peck, Gibson, Dooley and Morse, JJ.


     DOOLEY, J.   Defendant, David J. Sweeney, purchased a restaurant in
Stowe from plaintiff, Jane Licursi, giving three mortgages, including a
third mortgage to plaintiff, to finance the purchase.  Plaintiff regained
title by foreclosing on her third mortgage and by buying out the second
mortgage.  She then brought this action on the unpaid note, which the
second mortgage secured, and obtained a judgment below.  Defendant appeals,
arguing in various ways that no action lies on this note.  We agree and
reverse.
     In 1983 plaintiff sold the Matterhorn Restaurant in Stowe to defendant
and R. Bruce Nourjian for $240,000.  The sale was financed in part by funds
obtained in return for three promissory notes:  a note to a corporate lender
in the amount of $85,000 and secured by a first mortgage; a note from
defendant to Nourjian in the amount of $60,000 and secured by a second
mortgage; and a note from defendant to plaintiff for $50,000 and secured by
a third mortgage.  Defendant paid the remainder to plaintiff in cash.
Defendant failed to pay on the note to plaintiff, and on October 31, 1984,
plaintiff began a foreclosure action on her third mortgage.  A judgment
order and decree of foreclosure was entered against defendant, Nourjian and
LiBas Corporation (holder of a security interest in the personalty), on
September 27, 1985.  A certificate of non-redemption was issued on October
3, 1985.  The decree of foreclosure granted plaintiff "immediate title to
and possession of" the restaurant.  Plaintiff entered into possession of the
restaurant on October 3, 1985.
     At the time of the foreclosure and the issuance of the certificate of
non-redemption, the value of the Matterhorn Restaurant was $240,000, a sum
in excess of the aggregate due on all three mortgages.  The amount of
principal due on the first mortgage on September 27, 1985 was $75,000; the
amount of principal due on the second mortgage on that date was $60,000.  No
payments were made on either the first or second mortgages after September
22, 1985, and they were in default as of October 22, 1985.  In return for
"value received," Nourjian assigned the second mortgage note and mortgage,
and quitclaimed his interest in the Matterhorn Restaurant, to plaintiff in
November, 1985.
     Thereafter plaintiff demanded payment from defendant on the promissory
note from him to Nourjian, which Nourjian had assigned to her.  Upon
defendant's failure to pay, plaintiff brought the present action.  Defendant
argued at trial that his obligation under the second-mortgage note had been
extinguished by merger, when a greater estate (the fee, obtained from
defendant by plaintiff via foreclosure) and a lesser estate (the second
mortgage) in the same property met in the same person, the plaintiff,
without an intermediate estate.  See  Wright v. Anderson, 62 S.D. 444, 253 N.W. 484 (1934); Annotation, Union of Title to Mortgage and Fee in the Same
Person as Affecting Right to Personal Judgment for Mortgage Debt, 95 A.L.R.
89 (1935).  The trial court, relying on Walker, Smith & Co. v. Baxter, 26
Vt. 710, 715 (1854), concluded that absent a showing of plaintiff's
intention to merge estates, no merger occurred.  Since merger was not in
plaintiff's interest, the court concluded that she did not have the intent
to allow a merger.  The court's conclusion resulted in a judgment for
plaintiff for $60,000, the amount of the note, plus interest due under the
note.  The present appeal followed.
     The trial court and the parties have generally analyzed the issue here
as one of merger of estates. (FN1) The question before us, however, is whether
the plaintiff can collect on the note signed by defendant.  Although the
question may be related to the doctrine of merger, it is a different
question.  See Burkhart, Freeing Mortgages of Merger, 40 Vand. L. Rev. 283,
369 (1987) ("merger is absolutely inapplicable to the debt aspect of the
mortgage transaction").  It must be resolved by the application of contract
principles.  See id.
     To examine this question, we need to examine the independent offices of
the mortgage security and the note.  If a mortgagee holds the note, he or
she may proceed on either to collect the debt owed.  See Shapiro v. Gore,
106 Vt. 337, 339, 174 A. 860, 860 (1934).  If, however, the debt is
satisfied through the mortgage, in whole or in part, the obligation
represented by the note is also satisfied unless a deficiency is owed.  See
Hewey v. Richards, 116 Vt. 547, 551, 80 A.2d 541, 543 (1951).  Only the
excess of the debt above the value gained from the mortgage satisfaction can
be recovered from the obligor on the note.
     There is no question here that the mortgage originally given to
Nourjian was satisfied by its purchase by plaintiff.  Plaintiff is now both
mortgagee and mortgagor on this mortgage, and there are no intervening
creditors.  This second mortgage no longer has any legal significance to
this controversy, except that the circumstances of its satisfaction affect
the amount due on the note.  To determine this, we must look to see if there
is any deficiency.  The value of the Matterhorn Restaurant, $240,000, less
the principal due on the first mortgage, $75,000, was $165,000.  The amount
owed to plaintiff at the time of foreclosure of the third mortgage was
$50,000.  Assuming she paid full price for the second mortgage at $60,000,
the amount of money she has extended in these transactions is $110,000.  The
property was valued by the court far in excess of the amounts owed.  There
is no deficiency, and plaintiff cannot recover.
     Almost this exact situation is described in the leading treatise on
mortgages as follows:
         [I]f the holder of both a junior and senior mortgage
         forecloses the junior and buys at the foreclosure sale
         it is generally held that, in the absence of an
         agreement to the contrary, the mortgagor's personal
         liability for the debt secured by the first mortgage is
         extinguished.  The reason given is that upon a
         foreclosure sale under a junior mortgage the purchase is
         subject to the payment of the prior lien with the result
         that "the mortgagor has an equitable right to have the
         land pay the mortgage before his personal liability is
         called upon" and the purchaser, if he owns or acquires
         the mortgage, will not be permitted to enforce it
         against the mortgagor personally.  The second mortgagee
         purchaser is presumed to have made allowance for the
         prior lien in making its bid.

           The above result and analysis are logical and fair
         only if one assumes that the land was worth at least an
         amount equal to the sum of the two mortgage debts.
         Thus, for example, if the first mortgage debt is
         $40,000, the second mortgage debt is $20,000 and the
         fair market value of the land free and clear of liens is
         at least $60,000, and the mortgagee purchases for
         $20,000 (fair market value less $40,000) it makes sense
         to apply merger to destroy the senior debt.  In such a
         case, the mortgagee would be unjustly enriched if he
         were permitted to become the owner of land worth at
         least an amount equal to the sum of the two mortgage
         debts and also allowed to collect on the senior debt.

G. Nelson & D. Whitman, Real Estate Finance Law 467-68 (2d ed. 1985)
(footnotes omitted).  While we differ with the treatise on the need to use
the concept of merger to reach its result, the circumstances here demand the
same result as in the treatise hypothetical.  As in the treatise
hypothetical, plaintiff here would be unjustly enriched if she could obtain
land worth well in excess of the secured debt and, in addition, obtain a
personal judgment for that same debt in the amount of $60,000.  The fact
that the mortgagee in the treatise hypothetical acquired the interest by
purchase at a foreclosure sale, while plaintiff here obtained the interest
by strict foreclosure, is irrelevant to the central point.  In both
instances the mortgagee would be unjustly enriched if allowed to collect
also on the personal debt instrument.  See also Burkhart, Freeing Mortgages
of Merger, 40 Vand. L. Rev. at 380-81 ("the purchasing lender would be
enriched unjustly if it could collect the debt secured by that lien").  In
short, plaintiff is seeking a deficiency judgment where there is no
deficiency.
     The analysis here is similar to that in the leading case cited by
defendant, Wright v. Anderson, 62 S.D. 444, 253 N.W. 484 (1934).  Wright
recognizes that the issue of personal liability on the debt obligation is
different from the issue of merger of the property interests.  It holds that
an "extinguishment" of the debt obligation occurs when the creditor holds
the fee interest and thereafter purchases an outstanding mortgage.  Id. at
453, 253 N.W.  at 489.  The reason is that the creditor "is the owner of the
res which ought to discharge the debt as between himself and the mortgagor
and he will not be permitted to retain the res and at the same time say it
is insufficient to satisfy the debt."  Id. at 450, 253 N.W.  at 487.  Wright
goes beyond familiar principles of unjust enrichment and denies recovery
even though the creditor has not obtained the full amount owed from the
land.  See id. at 447, 253 N.W.  at 486.  The asserted reason is that "a
purchaser who was willing to pay money for the equity of redemption will not
be heard to say . . . that the land (the primary fund for the discharge of
the prior encumbrance) is not worth the amount thereof."  Id. at 450, 253 N.W.  at 487.  We prefer a more fact-determinative analysis, based on the
equities and the economics of the situation, allowing plaintiff to recover
only if the land value were insufficient to cover the debt.
     Our analysis is also more consistent with the early Vermont precedents
relied upon by the trial court.  The trial court, in adopting its merger
analysis, relied primarily on the decision of this Court in Walker, Smith &
Co. v. Baxter, 26 Vt. 710 (1854).  Walker has some factual similarity to
this case.  It involves allowances against the estate of a mortgagor
pursuant to mortgage notes.  As in this case, the mortgagee-plaintiff had
acquired the fee interest in the estate.  He did so by purchasing it from
the mortgagor's estate.  The opinion, grounded on merger analysis, holds
that the purchase of the right of redemption "will not be considered a
merger of the different estates of the mortgagor and mortgagee, so as to
operate as payment or satisfaction of the debts for which the mortgages were
given, when it will operate inequitably, or to the injury of the mortgagee."
Id. at 715.  The language the trial court relied on states that in equity a
merger of estates occurs where the parties intend so or "there exists some
beneficial interest on the part of the mortgagee, that requires to be
protected, and where it is [to the mortgagee's] benefit to keep the legal
and equitable interests separate and distinct."  Id.  The core of the
reasoning, however, lies in the analysis of the economics involved and the
following principle:
         In cases where there is no interest on the part of the
         mortgagee to keep the two estates separate and distinct,
         a merger is effected by a union of the estates, the less
         estate sinks into the greater, and the debt will be
         treated as paid and satisfied, particularly if the value
         of the mortgaged premises is equal to the amount of the
         debt.

Id. at 715-16.  In Walker, unlike this case, the mortgages did not recover
for the plaintiff the value of the debt owed.  Indeed, when the adminis-
trator of the estate sold the fee interest to plaintiff, he disclosed the
presence of the former mortgages and stated that 50% of plaintiff's out-
standing debt would be paid by the estate.  Id. at 716.  The Court
specifically found that plaintiff relied upon the administrator's
representation in purchasing the equity of redemption and the price
reflected that representation.  Id. (FN2)
     Although its confusing analysis of merger obscures the central holding,
Walker is consistent with the result we have reached here.  By analyzing the
relationship between the parties, it reached a result that was equitable to
the interests involved.  While it was concerned with the "best interests" of
the mortgagee, those best interests were to obtain the benefit of the
bargain, not to obtain a double windfall recovery.  We see nothing in
Walker that requires us to go further here.  See also Board of Trustees v.
Ren-Cen Indoor Tennis & Racquet Club, 145 Mich. App. 318, 325-26, 377 N.W.2d 432, 436 (1985) ("equity is of no assistance to plaintiff under the
circumstances presented here, because plaintiff seeks to avoid a merger to
enable it to obtain, in effect, a double recovery), leave to appeal denied,
425 Mich. 875, 388 N.W.2d 874 (1986).
     A more troubling precedent is Ryan v. Stearns, 135 Vt. 385, 376 A.2d 728 (1977), a case not cited by the trial court or the parties.  While the
facts of the case are confusing, the situation before the Court was similar
to that present here because the plaintiff held the equity of redemption as
a result of a foreclosure, as well as an outstanding mortgage.  Plaintiff
then sold the property to a third party for a price exceeding the
outstanding debt that was owed to her.  She sued on the note, and defendant
responded that she had been paid from the proceeds of the sale and was
seeking a double recovery.  This Court responded to the argument as
follows:
           Certainly, as acknowledged by both parties, the
         appellee stands to gain a substantial profit as the
         result of her resale of the property.  This appears,
         however, to be a "so what?" proposition.  The appellee
         having paid a consideration . . . for the property, we
         fail to discern any theory that would bar her from
         obtaining a profit. . . .  The appellee has paid a good
         and valid price for the property independent of the
         note, and is entitled to her profit.  Similarly, she has
         purchased the subject promissory note for its face value
         plus interest.  In the absence of any credible defense
         offered by the appellants, she is entitled to recover
         against those liable on the note.

Id. at 389, 376 A.2d  at 731.  The opinion in Ryan is criticized persuasively
in Burkhart, Freeing Mortgages of Merger, 40 Vand. L. Rev. at 384 n.320, as
economically unsound because plaintiff had already recovered the amount owed
to her from the sale of the property and was seeking a double recovery.  The
Court's result unjustly enriched her.  The result in Ryan can be explained
by the failure of the defendant to offer a "credible defense" on which the
Court could rely.  To the extent Ryan is read as supporting a contrary
result here, it is overruled.
     Plaintiff here has already recovered all she is entitled to.  Allowing
recovery on the note would only unjustly enrich her.  This action should
have been dismissed.
     Reversed.

                                        FOR THE COURT:




                                        Associate Justice



FN1.    Plaintiff for the first time in this Court argues that defendant
failed to plead merger and cannot rely on it here.  Defendant did plead
accord and satisfaction, which was sufficient to put plaintiff on notice of
his defense to the note under the theory adopted by this Court.  In any
event, the defense raised here was developed by the stipulated facts and
addressed without objection by the trial court.  It was tried by the
"implied consent" of the defendant.  See V.R.C.P. 15(b); Silva v. Stevens,
2 Vt. L.W. 22, 25 (Jan. 11, 1991).  The issue is properly before us.

FN2.    A later case, Belknap v. Dennison, 61 Vt. 520, 17 A. 738 (1889),
also relied upon by the trial court and the plaintiff, is only of limited
relevance here because it involved a mortgage foreclosure and not an action
on the underlying debt.  It is also factually distinguishable because the
plaintiff held a first mortgage and the fee interest, while defendant held a
second mortgage.  The Court held that it must find merger inapplicable so
that plaintiff could "retain a priority over other incumbrances," that is,
defendant's second mortgage.  Id. at 521, 17 A.  at 738.