Coler v. Barth

Mr. Justice Campbell delivered the opinion of the court. This controversy is best presented by a consideration of the three propositions relied upon by the plaintiff in the trial court. They are as follows: first, there was collusion between the grantee Coler, through his agents, and the trustee, to get title to the property in fraud of the plaintiff’s equities; second, after there was tendered to the trustee, as paid and canceled, the note that was secured by the trust deed which was being foreclosed, all subsequent proceedings were absolutely void, and the conveyance by the trustee nugatory; third, the property was not conveyed to the highest and best bidder. It is to be regretted that the testimony of Barth and O’Malley was not received, for thereby much of the uncertainty concerning the purpose and origin of this sale would be removed, and many other questions of fact, now obscure, would probably be made plain. Why Barth first foreclosed and sold the property under his second and third trust deeds, instead of proceeding under the first one, or what advantage he supposed he was getting by such an election, we do not know. Neither are we advised (except by inference or conjecture, as to which different conclusions might be drawn) what was his motive in foreclosing under the first deed of trust after acquiring, as he claimed, the title, or, at least, Martin’s equity of redemption at the sale under his two — 37 — junior liens. He neglects to inform us, and while his purpose may have been honorable, it might, also, have been unworthy, when we consider the conflicting claims of the interested parties. That this somewhat complicated controversy may be the better elucidated, it is well briefly to recall the situation of the parties, and the relative priority of their respective liens, up to the time the sale began. The first and second trust deeds covered the same property. They secured notes of the face value respectively of $5,000 and $10,000, which were owned by Barth. The amount realized at the sale under the second trust deed, the proceeds from a prior sale of personal collateral, and other payments on the principal, left due on the $10,000 note on the day of the sale in question near $4,500. Upon the $5,000 note there was at that time due not far from $5,700, making a total indebtedness at that date upon the first two notes of about $10,200. Prior to all incumbrances securing the other notes owned by Barth, was the lien upon the water right that secured Coler’s bonds. It is true that the trust deed to the Central Trust Company did not include all the lands embraced within the first and second trust deeds securing Barth’s indebtedness ; but as to a part thereof (viz., a perpetual water right of the specified capacity, from Lake Miriam winch was situate on one of these tracts of land), it constituted a lien third in order of priority, and superior, as to said water right, to all liens of a subsequent date. Such being the situation, the thought naturally suggests itself that it was to the interest of Barth to buy in tins property at the lowest possible price, while it was for the interest of Dr. Martin that the trustee should realize from the sale the highest obtainable sum. 1. As to the first contention of the plaintiff (appellee here), no finding was made by the court below. After a consideration of the voluminous record before us, we are of opinion that it is not sustained by the evidence. 2. With respect to the two findings of fact made by the — 38 — trial court, there was not helow, nor is there here, so much controversy between the parties as to their correctness, under the evidence, as there is concerning their legal effect. Indeed, we may say that the evidence clearly upholds these findings; and we therefore proceed to an ascertainment of what decree should be predicated upon them. It is stated as a general rule, and it is unquestionably correct, that the note secured by a mortgage, or a deed of trust in the nature of a mortgage, is the principal thing, and the security but an incident; and, as a corollary, when the note is paid, or the indebtedness thus represented released, there can be no valid sale under the mortgage. This consequence, in the absence of a controlling equity calling for some qualification, is as true as the main proposition itself. Barth v. Deuel, 11 Colo. 494, 503; Mutual Mill Ins. Co. v. Gordon, 20 Ill. App. (Bradwell) 559, 566 ; Coffing v. Taylor, 16 Ill. 457; Pearce v. Bryant Coal Co., 25 Ill. App. (E. B. Smith) 51; Redmond et al. v. Packenham et al., 66 Ill. 434, 437. Let us see whether there is present in tins case some feature that demands a relaxation of the rule, or a yielding by it to some stronger equity. Strict foreclosure, where the mortgagee takes the property in full satisfaction of the mortgage debt, is in some respects analogous to foreclosure and sale under a deed of trust, as framed in this state, and as our law was when the sale in question occurred. In both cases the mortgagor’s equity of redemption is gone. 1 Jones on Mortgages, sec. 950 ; 2 Jones on Mortgages, sec. 1569, and cases cited. In the former case, any subsequent conduct of the mortgagee recognizing the continued existence of the mortgage, or evidencing an intention not to hold the property as a full satisfaction of the debt—as, for example, proceeding to sue on the debt for an alleged balance—opens the door to the mortgagor to redeem. When in the case at bar Barth, not content with the title he got at the first sale under the junior lien, elected to foreclose the first deed of trust, this was not a proceeding to — 39 — recover an alleged balance upon the second note, and hence the same principle just mentioned is not strictly applicable. But when a creditor having two deeds of trust of different priorities upon the same property for different debts, enforces first the junior and then the superior lien, he should be held in making the sale under the first deed of trust—in accordance with an analogous principle—to open up the mortgagor’s redemption, at least to the extent of giving to him a right to participate in the sale, and to a voice in its conduct. This act of Barth in the subsequent enforcement of the senior lien was a recognition by him of the existence of the $5,000 note, and a distinct acknowledgment that Martin still had some title or interest in the property of value which it was desirable for him (Barth) to obtain. He held out to the public that a sale of the property was to be had, caused notice thereof to be advertised, and the trustee in opening the sale and in the reading of the advertisement publicly announced that the proceeding was for the purpose of selling Martin’s interest in the property in order to pay his note. Barth led bidders to believe that a bona fide sale was to be had, and Martin and Coler, acting upon the good faith of the announcement, were, among others, on hand to protect their interests. There is no pretense that the note was, in fact, paid by Martin, or by any one for him. The fact is that Barth chose to cancel it for reasons satisfactory to himself, which are apparent when we come to consider the situation. This choice was first made known after the bids amounted to more than the sum due upon it. But to stop the sale at this stage would have been highly inequitable both to Martin, who, as the maker of these various instruments and as the owner of a possible remote equity of redemption, had the right to insist upon the sale going on, and also to Ooler, whose bonds came in ahead of all Barth’s claims, except to the amount of about $10,200, after the bids passed beyond that sum. It was then apparent that something more was to be real — 40 — ized from tire sale tiran the amount of Barth’s first note, and then it would have been unjust to Martin to be deprived of this excess. We conclude that, under the facts of this case, the trustee, representing not merely the creditor Barth but also Dr. Martin, might properly and legally go on with the sale, and get out of it, not only the amount due on the first note, but as much more as he could to apply on Martin’s other indebtedness. 3. The trust deed provided that the sale should be made to the highest and best bidder for cash. This fact was amiounced by the trustee, both at the beginning and close of the bidding, according to the testimony of the witnesses for the defendant, which is denied by some of the witnesses for the plaintiff. If, however, there was no such announcement, still it was the rule by which the authority of the trustee was measured, and under which the sale must be made and the deed of conveyance executed. Quillian, for Hanna, and Heisler, for Barth, nominally bid $200 more than Coler to whom the trustee made the deed. Literally, and in one sense, Coler was not the highest bidder; but it does not follow that he was not the highest and best bidder for cash. Where the power of sale provides that it be for cash, the trustee is not bound to bid off, or sell, to the one who makes the highest bid, unless it is for cash, and bona fide. He must exercise his sound judgment in determining who is the proper party entitled to the deed, and he may take time for that purpose. If, through mistake, he strikes off the property to the wrong person, or to one not in a position to comply, or by subsequent investigation learns that the proper bid was not selected at the sale, he may, nevertheless in the exercise of a wise discretion, and if it appears that substantial justice has been done, and the rights of interested parties protected, select the proper person to whom, under the power by which he is acting, the sale should be made, and the deed given. 1 Devlin on Deeds, sec. 442; Gray v. Veirs, 33 Md. 18. — 41 — Here Quillian, whose bid was the highest, refused to carry out his contract, while Coler stood ready to pay the full purchase price in cash. Quillian offered to turn in, as cash, some of these various subsequent notes of Martin, held by Barth; but under the peculiar circumstances of this case, we consider that the trustee was not obliged to determine for himself and at his peril the validity and genuineness of these various notes, on some of which payments were indorsed. His experience already with the $5,000 note upon which he was conducting the sale, and which he supposed was unpaid, and winch Barth must have represented to him as unpaid in order to get the trustee to act, but which Barth’s agent tendered to him as paid during the progress of the sale, naturally would awaken his suspicion that these other notes tendered by Barth might not be altogether unquestioned. . We must not be understood as holding that a second mortgagee to protect himself may not, in payment of his bid made at a foreclosure and sale under a first mortgage, if such bid exceeds the prior debt, turn in as cash the valid indebtedness or notes of the mortgagor, after paying cash to the amount of the senior debt. That sort of a case is not before us. If we recognize the rule that the debtor’s valid notes are the equivalent of cash, and may be so used by such a bidder, still Barth’s agents did not observe it. The first note and the balance of $4,500 due on the second note may have been so applied under this rule. These two equalled $10,200, leaving a difference between them and the amount of the purchase price, of $5,100. This was the only indebtedness of Barth’s that was senior to that evidenced by the bonds. The subsequent notes of Barth which were tendered as part of the purchase price were secured by an instrument subsequent in date to that of the trust deed to the Central Trust Company securing Coler’s bonds. Barth’s subsequent notes, therefore, were not, in this transaction, the equivalent of cash. This is manifest, for, if it was the duty of the trustee out of the purchase money to pay the secured obligations of Martin in the order of their priority, then, certainly, Coler’s — 42 — bonds, at least to the extent of the value of the property included in the Central Trust Company’s deeds, were ahead of Barth’s notes; and had the trustee received as cash these subsequent notes of Barth, he would have violated this order of priority. Hence, even under the rule invoked by appellee, he failed to tender the entire purchase price in cash, or its equivalent. Upon these facts we are satisfied that Coler, and not Barth, was the highest and best bidder for cash. For this reason the contention of the appellee that it was the trustee’s duty, after Quillian refused to protect his bid, to readvertise the property, is not tenable. As we have said, while nominally the highest bidder was Quillian, as a matter of fact, he was not the highest and best bidder for cash, but Coler was. After the trustee refused to stop the sale at Heisler’s request, neither the latter nor Quillian considered the subsequent proceedings valid. Their bids were not bona fide and were not intended as such, and plaintiff’s own evidence is conclusive upon the point that neither believed a deed thus made conferred any title. No one present at this sale who desired, or was prepared, to make a genuine bid, was prevented from doing so, unless it was by the conduct of Barth’s agent; and we see no reason for setting aside, at his instance, this sale upon the ground that it was not made to the highest bidder. 4. The fact that the trustee did not, as appellee contends, make a proper application of the purchase money in excess of the amount due on Barth’s first note, but, instead of delivering it to Martin, should have paid it to Barth,—is no ground for canceling these deeds or setting aside the sale. If the trustee was guilty of bad faith, or made a mistake, in not giving the surplus to Barth, if he was entitled to it, it was his act after the sale was over, and after Coler’s rights were fixed. The court did not find, nor is the evidence sufficient to establish, that this act of the trustee was the result of any fraud or conspiracy in which Coler participated, and as the express provisions of the trust deed absolve the pur — 43 — chaser from any responsibility for a wrong application of the purchase money Barth must look to the trustee, or to Martin, vho is not a party to this action, and not to Coler, for any alleged diversion of that fund from its proper channel. Many other questions have been discussed by counsel—■ some of them interesting, hut, in our viev of the case, not important or controlling—and for these reasons ve have not discussed them, though ve have examined into every phase of the case as presented by counsel. Upon the whole case we are satisfied that substantial justice requires that this case he reversed. The trial court did not err so much in its findings of facts as in the application of the law to those facts. The facts as found do not support the judgment rendered by the lower court. For these reasons the decree is reversed, with .instructions to the lower court to dismiss the plaintiff’s complaint, without prejudice to the right of the plaintiff hereafter to proceed against defendant O’Malley for the alleged misapplication of the purchase money. Reversed.