Opinion
Decided June 1, 1931.
Mortgages — Error to foreclose undue first mortgage and order premises sold, when — Subsequent lienholder entitled to foreclosure and sale, subject to first mortgage.
It constitutes prejudicial error for the trial court to decree the foreclosure of an undue first mortgage and sale of the mortgaged premises at the suit of a subsequent lienholder, where the owner of the first mortgage does not consent thereto. Where such consent is lacking, the proper practice is to grant foreclosure to subsequent lienholder entitled thereto and order the premises sold subject to the first mortgage.
ERROR: Court of Appeals for Lucas county.
Mr. Orville Raudabaugh and Messrs. Boggs, Doty Chase, for plaintiffs in error.
Mr. Frank M. Sala, for defendant in error.
The plaintiffs in error, the Metropolitan Mortgage Company and the Union Central Life Insurance Company, bring this proceeding in error against the defendant in error, the Nugent Furniture Company, and seek a reversal of a judgment of foreclosure in the court of common pleas for alleged error in refusing to order the premises sold subject to the first mortgage.
The action in the court below was brought by the Metropolitan Mortgage Company against Edna E. Murphy, the Nugent Furniture Company, and Grant F. Northup, as treasurer of Lucas county, Ohio. The petition of the plaintiff contained two causes of action, the first of which was founded upon a promissory note for $1,942.15, executed and delivered to plaintiff by the defendant Edna E. Murphy. The second cause of action was founded upon a mortgage upon certain premises in the city of Toledo, executed and delivered to secure the promissory note set forth in the first cause of action. The petition, after averring that the conditions of the mortgage had been broken, set forth that the Union Central Life Insurance Company had a first mortgage on the premises and was willing that the property be sold subject to said first mortgage. There was a further averment that the Nugent Furniture Company and Grant F. Northup, as treasurer of Lucas county, had some interest in the property and that they should be required to set the same up or be forever barred. The claim of the treasurer was one for taxes on the premises.
The owner of the property, Edna E. Murphy, did not appear in the action though duly served with process.
The answer of the Nugent Furniture Company set up a judgment against Edna E. Murphy in the sum of $1,666.54, and prayed for marshaling of liens and sale of the entire property. The Union Central Life Insurance Company was made a party defendant and filed its cross-petition setting up its mortgage, which was given to secure thirty-one notes, two falling due each year and the last one becoming due October 1, 1944. The amount loaned was $4,200, but as the notes were given upon the amortization plan, each note was for the amount of $214.28 and bore no interest until due. Each note contains an acceleration clause which permits the holder of the unpaid notes to elect to declare the entire indebtedness due and payable upon default. The two notes of earliest maturity have been paid, and two more are now due. The Union Central Life Insurance Company has not elected to declare all of the notes due and payable, and in its cross-petition it avers that it does not elect to accelerate the maturity of the notes not yet due. Each note also contains the following provision for payment at any time:
"The right is reserved to prepay this note at any time at the home office of said company in Cincinnati, Ohio, by payment of its present worth as ascertained by discounting it at the rate of 5% interest compounded semi-annually, provided all prior notes have been paid.
"The right is further reserved to pay in full the unpaid principal in this series of notes with interest accrued, plus four months' additional interest, at any time prior to three years of maturity and at any time thereafter without additional interest."
This cross-petition concludes with a prayer for sale of the premises subject to the first mortgage, and, if this cannot be done, that the mortgage be declared to be the first and best lien on the proceeds derived from the sale.
The court below found that the Union Central Life Insurance Company had the first and best lien, that the Metropolitan Mortgage Company had the second best lien on said premises, and that the Nugent Furniture Company had a third lien thereon by way of judgment, but the court refused to sell the premises subject to the mortgage of the Union Life Insurance Company, and ordered the whole premises sold and the money distributed to the lienholders.
In volume 30 O.L.R., pages 3 and 41, may be found a very interesting discussion of the law relating to sale of property on foreclosure in Ohio.
The Code of Civil Procedure, at the time it became effective July 1, 1853, contained Section 374, which read as follows: "In the foreclosure of a mortgage, a sale of the mortgaged property shall in all cases be ordered." This section as amended in 56 Ohio Laws, 84, and in 67 Ohio Laws, 114, contained the language quoted. In the Act to Revise and Consolidate the Laws Relating to Civil Procedure, it became Section 7 of Chapter I, Division IV, 75 Ohio Laws, 667. Upon the amendment of this Section in 76 Ohio Laws, 27, this language remained unchanged, and was carried into the Revised Statutes as Section 5316. The provision is now found in Section 11588, General Code, and reads as follows: "When a mortgage is foreclosed or a specific lien enforced, a sale of the property shall be ordered * * *." The words "or a specific lien enforced" were added to Section 5316, Revised Statutes, in 94 Ohio Laws, 283.
This provision has been held to require a sale of the mortgaged premises in a foreclosure proceeding. Stewart v. Johnson, 30 Ohio St. 24, 29; Holliger v. Bates, 43 Ohio St. 437, 2 N.E. 841; Winemiller v. Laughlin, 51 Ohio St. 421, 38 N.E. 111; Stewart, Admr., v. Wheeling Lake Erie Ry. Co., 53 Ohio St. 151, 41 N.E. 247, 29 L.R.A., 438.
Although in the cases cited the foreclosure suit was brought by a junior mortgagee, the prior mortgage indebtedness was due and payable. Whether, under the provision requiring mortgaged property to be sold, the mortgaged premises could be sold in a foreclosure suit brought by a junior incumbrancer by order of the court without the consent of the prior first mortgagee, where the indebtedness secured by such mortgage was not due and payable, has never been determined by the Supreme Court of Ohio. The practice in Ohio, however, has been to hold in the hands of the court sufficient proceeds to discharge the undue indebtedness under a prior mortgage as it becomes due and payable.
April 25, 1898 (93 Ohio Laws, 284), by the enactment of Section 5391, Revised Statutes, now Section 11675, General Code, the court was given authority to sell real estate subject to a prior lien in cases where a junior mortgage or other junior lien was sought to be enforced against real estate by decree of court. Under the law as it exists in Ohio, there is no question that the court in its discretion may order property sold, and liens marshaled, where all the indebtedness secured by liens is due, but a difficulty arises where the first mortgage indebtedness has not matured and the holder thereof does not consent to a sale of the property.
In the instant case the mortgage indebtedness will not mature for many years, and, if the owner of a judgment lien subsequent in priority can compel the foreclosure of an undue first mortgage, then funded indebtedness extending over long periods of time, and not maturing for many years, is placed in a precarious position. This problem is discussed in Penn, Trustee, v. Atlantic Great Western Ry Co., 3 Dec. Rep., 508, 11 Am. L. Reg., 576. At the time of that decision, Section 11675, General Code, had not been enacted, but it is apparent that the purpose of its enactment was to take care of exactly such a situation as is presented to us.
The notes of the insurance company in the instant case contain a provision by which the whole indebtedness may be paid at any time, and undoubtedly the holder thereof is required to accept payment according to the terms of its contract, but, if the court sells the whole property and the amount obtained therefor is insufficient to satisfy the indebtedness owing to the insurance company, it will result in the mortgage being foreclosed before it is due, and the whole amount owing not being paid. The insurance company would then not get the entire amount of money to which it is entitled under the terms of the mortgage contract.
It is our judgment that the court was without power to order the whole premises sold, thereby foreclosing the lien of the first mortgagee without its consent and before maturity of the debt, and that in doing so the trial court committed prejudicial error.
For the reasons given, the judgment will be reversed, and the cause remanded for further proceedings not inconsistent with this opinion.
Judgment reversed and cause remanded.
LLOYD and RICHARDS, JJ., concur.