Cowles v. Sunshine, No. S1158-04 CnC (Norton, J., June 23, 2005)

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STATE OF VERMONT                                     SUPERIOR COURT
Chittenden County, ss.:                          Docket No. S1158-04 CnC



COWLES

v.

SUNSHINE



                                  ENTRY

       This case is about the difference between personal liability on a
promissory note and liability that is limited to the value of a mortgaged
property. In 2001, Plaintiff brought a foreclosure action on a mortgage that
Defendants had secured with property in Richmond. At that time, Plaintiff
also brought a second claim for a deficiency judgment. On June 1, 2001,
this court issued a judgment and decree of foreclosure. In it, the court
established that the defendants owed Plaintiff $451,875, and it ordered a
period of redemption after which Defendants’ right to the property would
be foreclosed.

        When Defendants failed to redeem the property, the foreclosure
became absolute and the court issued a writ of possession to Plaintiff for
the property. Since then, Plaintiff has sold the property for $396,000. Now
Plaintiff seeks a deficiency judgment against Defendants for the remaining
$55,875. Defendants have objected on several bases and both parties have
filed for summary judgment.

        Defendants argue that Plaintiff cannot bring these claims because
she could have raised them—or the facts underlying them—in the previous
foreclosure action. This collateral estoppel– res judicata argument is
premised on the idea that foreclosure and deficiency are one action and that
Plaintiff should have pressed the claim at foreclosure. This would have
been somewhat of an epistemological conundrum for Plaintiff since it
requires her to have made a specific claim for deficiency before a post
foreclosure sale established such a deficiency. Setting that aside, however,
this argument misstates the essential separation between mortgage
obligations and personal liability. In LaFarr v. Scribner, the Vermont
Supreme Court held that the two were different areas of the law, invoking
distinct jurisdiction, and raising separate issues. 150 Vt. 159, 160–61
(1988); see also 4 J. Backman, Powell on Real Property § 37.12[2] (1999).

       Instead of barring an action for deficiency, LaFarr allows that
foreclosure sets the stage for a deficiency action.

       The issues raised in a foreclosure action include the validity of the
       mortgage, the amount of indebtedness due on the mortgage, and
       the right of the mortgagee to seek satisfaction of the indebtedness
       from the mortgaged property. A judgment and decree of
       foreclosure will bar litigation of those issues in another action by
       virtue of the doctrine of res judicata. . . . A foreclosure judgment is
       res judicata as to the amount of the unpaid debt secured by the
       mortgage, but is not res judicata as to the defendant’s liability for
       any deficiency. The defendant in a deficiency action may also set
       up a variety of defenses based upon facts or circumstances
       connected with the inception of the mortgage.

Id. at 161. Thus, the res judicata effect of the prior foreclosure judgment is
to set the amount that Defendants owe, $451,875.

        As to the argument that Plaintiff should nevertheless be estopped
from asserting this action because she included a claim for deficiency in her
original pleading, collateral estoppel is improper. Among other things, the
doctrine requires a final judgment on the merits of the issue the party seeks
to preclude. Scott v. City of Newport, 2004 VT 64, at ¶ 8 (mem.). This
limits what courts may preclude to those issues that have been resolved to
some semblance of finality. 18 C. Wright, et al., Federal Practice and
Procedure § 4420 (2002). Since Plaintiff did not seek a judicial sale of the
property but chose a strict foreclosure, the issue of deficiency was never
ripe or proper for the court to make any judgments. While V.R.C.P. Rule
80.1(j) does allow for a deficiency judgment, it is only for a foreclosure by
sale, Rule 80.1(h). As the judgment order and decree and the July 31 Writ
of Possession, giving Plaintiff possession of the property, make clear, this
was a strict foreclosure that did not have the accompanying procedures of a
foreclosure by sale. Compare 12 V.S.A. § 4528, with 12 V.S.A. §§ 4531a–
4533a (detailing the procedures for foreclosure on a mortgage with a power
of sale); see also Note, The Relation of the Equitable Doctrine of
Subrogation to Vermont's Strict Foreclosure Laws, 7 Vt. L. Rev. 71, 77–78
(1982) (“Vermont is a ‘title’ state; as such, it recognizes a mortgage deed as
purporting to convey legal title . . . .”). Therefore, neither Plaintiff nor
Defendants can rely on Rule 80.1's provisions for foreclosure by sale as a
basis for this deficiency claim.

       This leaves a large, unresolved question, What is the basis for
Plaintiff’s deficiency claim? While the foregoing makes clear that Plaintiff
cannot rely on the mortgage, LaFarr holds that Plaintiff may bring an action
on any accompanying promissory note or similar device that would make
the Defendants liable. 150 Vt. at 160, 162. Up to this point, both parties
have focused exclusively on the mortgage that fueled the previous
foreclosure. They have not established whether or not there was another
obligation. Without such evidence either establishing or an affidavit
disproving the existence of such a note, summary judgment is
inappropriate.

       Finally, Defendants raise at least one factual question about fair
market value and the $396,000 that Plaintiff obtained for the property. The
price Plaintiff received was based on an appraisal of the parcel as a whole.
Defendants argue that a better, more profitable use of the land would have
been to subdivide it. This, according to Defendants, would have yielded a
fair market value in excess of the mortgage. While this theory is open to
several counter-arguments, the nature of the dispute is ultimately factual.
Fair market value is a term of art that is dependant on wide array of fact-
based evidence. Therefore, this dispute also renders summary judgment
inappropriate at this time.

     Based on the foregoing, Plaintiff and Defendants motions for
summary Judgment are Denied.

       Dated at Burlington, Vermont________________, 2005.
