Pappas v. Eastern Savings Bank, FSB

This case is the continuation of a dispute that arose several years ago between hen-holders of a property located at 2507 33rd Street, S.E. (“the 33rd Street property”). Appellants, who obtained judgment hens against the 33rd Street property to satisfy *1232 certain debts, complain that their liens were not satisfied from the proceeds of a foreclosure sale of the property conducted at the instance of appellee/mortgagee Eastern Savings Bank (“ESB”), and ask that the sale be set aside. The trial court granted summary judgment in favor of ESB. We affirm.

I. Background

The early history of this dispute is set out in Eastern Savings Bank, FSB v. Pappas, 829 A.2d 953 (D.C.2003) (“Pappas I”). We borrow liberally from that description.

In 1980, Aphrodite Pappas, who was the owner of the 33rd Street property, conveyed the property to Vasiliki Pappas in fee simple. Soon thereafter, Aphrodite Pappas died, leaving her three children as heirs. 1 Vasiliki Pappas was named personal representative of the Aphrodite Pap-pas estate. In 1986, however, the Probate Court removed Vasiliki Pappas as personal representative because of numerous improprieties with respect to her fiduciary responsibilities.

On April 18, 1990, Vasiliki Pappas executed a deed of trust on the 33rd Street property to secure a loan made to her by CitiBank Federal Savings Bank (“Citi-Bank”) in the amount of $159,000, which deed of trust was recorded at about the same time. In 1992, and again in 1996, the successor personal representative of the Aphrodite Pappas estate obtained judgments against Vasiliki Pappas personally for breach of fiduciary duty. These judgments, too, were duly recorded in the land records, and they became effective as judgment liens against all real property titled in the name of Vasiliki Pappas, including the 33rd Street property. The record discloses that the total value of those liens is in excess of $240,000. In March 1999, the Probate Court ordered that portions of the judgments obtained by the successor personal representative of the Aphrodite Pappas estate be distributed to the beneficiaries, the Pappas heirs. 2

By 1998, Vasiliki Pappas was in default on the CitiBank deed of trust, and Citi-Bank instituted foreclosure proceeding. In November 1998, Vasiliki Pappas secured a loan from ESB and executed a promissory note in the amount of $ 168,000 payable to ESB, $153,800 of which was used to refinance and discharge the earlier CitiBank loan. This note was secured by a new deed of trust with respect to the 33rd Street property, which was recorded on November 6, 1998. The CitiBank deed of trust was released by an instrument dated September 15, 1999, and recorded January 15, 2000. The interest rate on CitiBank’s promissory note had been approximately 10.5%; the rate on ESB’s note was 14.25%.

Soon after executing the promissory note and deed of trust in favor of ESB, Vasiliki Pappas defaulted on the ESB loan. ESB prepared to foreclose. In connection with that preparation, counsel for ESB caused the title to be examined, and ESB learned for the first time that there were judgments in favor of the Pappas heirs against Vasiliki Pappas individually and also learned the amount of the total judgment debt. The record discloses that on February 4, 2000, a lawyer for the estate of Frances Papageorge (one of the Pappas heirs), wrote to ESB’s counsel about ESB’s foreclosure sale notice published sometime prior to that date, noting that the foreclosure sale was being delayed be *1233 cause of Vasiliki Pappas’ bankruptcy petition and inquiring about how ESB would handle the judgment liens.

On December 19, 2000, ESB brought a suit for declaratory relief against the Pap-pas heirs in their individual names, claiming that its lien had priority over the heirs’ judgment liens under the principle of equitable subrogation. The trial court held that the heirs’ hens, which were recorded first, were first in right, but this court reversed, holding that ESB, having paid CitiBank to satisfy Vasiliki Pappas’ indebtedness to CitiBank, had the superior hen by virtue of the doctrine of equitable sub-rogation. See Pappas I, 829 A.2d at 960. 3 We remanded the case to the trial court to determine “whether, and to what extent, [ESB] is entitled to equitable subrogation for interest on the $153,800 it paid Citi-Bank to release CitiBank’s Deed of Trust.” Id. at 960 n. 13 (emphasis in the original). The trial court eventuahy determined, by order dated January 27, 2005, that ESB’s superior hen was to the extent of the original $153,800 indebtedness plus interest at 10.5%, for a total of $181,100.71.

In the meantime — while Pappas I was pending in the trial court, and before the appeal to this court and the resultant remand — ESB proceeded with foreclosure against the 33rd Street property. The foreclosure notice was sent to Vasiliki Pap-pas on March 16, 2001. Notice was also sent on that date to the (former) personal representative of the closed Aphrodite Pappas estate (which was the record holder of the 1992 and 1996 judgment liens). No notice was sent to the individual Pap-pas heirs. Notice of the foreclosure was published in the newspaper beginning on March 23, 2001. On April 3, 2001, the property’s substitute trastees (co-appellees here) sold the property to ESB, the high bidder at the sale, for $171,000 — an amount that, in light of the trial court’s determination about the extent of ESB’s superior lien, turned out to be less than the amount of the superior lien and insufficient to cover any portion of the Pappas heirs’ subordinate judgment liens. 4

On June 19, 2001, the Pappas heirs filed suit (a “creditors’ bill”) in the Superior Court against ESB, the substitute trustees, and Vasiliki Pappas, asserting that their judgment hens had not been satisfied from the foreclosure sale proceeds and asking the court to set aside the foreclosure sale and to conduct a judicial sale of the property from which their hens could be satisfied. ESB counterclaimed for a declaration as to the rights between the parties and reasserted its claim of subro-gation. The trial court stayed the proceedings until the conclusion of Pappas /, and thereafter, on August 4, 2005, entered summary judgment for ESB. The court held that appellants’ judgment hens had been “extinguished by the foreclosure sale conducted on April 3, 2001.”

*1234 There followed this appeal. The Pappas appellants do not challenge the holding that ESB had a subrogation lien superior to theirs to the extent of $181,100.71, but contend that ESB waived or should be estopped from asserting its subrogation rights. Appellants also argue that their own judgment liens were not extinguished through the April 3, 2001 foreclosure sale. They seek to invalidate the April 3, 2001 sale, and pray for a judicial foreclosure sale through which their liens might be satisfied.

II. Analysis

A. The Claim That ESB Should Be Es-topped from Invoking Its Subrogation Rights, and That It Waived Subrogation by Proceeding with a Non-Judicial Foreclosure

The general rule in this jurisdiction is that where a valid foreclosure sale yields proceeds insufficient to satisfy a priority hen, the result is extinguishment of subordinate hens. See Waco Scaffold & Shoring Co. v. 425 Eye St. Assocs., 355 A.2d 780, 783 (D.C.1976) (“Since the purchase price of the property was less than the amount of advances made under the loan, which constituted a superior interest, appellants’ hens were extinguished and their claims were properly dismissed.”); see also American Century Mortgage Investors v. Unionamerica Mortgage & Equity Trust, 355 A.2d 563, 566 (D.C.1976) (“The total amount derived from the sale of the property, when credited against appellees’ hens, was insufficient to satisfy these prior liens, and therefore appellant’s hen was extinguished.”). Appellants contend, however, that ESB’s foreclosure sale did not result in extinguishment of their hens. They assert that ESB foreclosed on the deed of trust that it recorded in 1998 rather than the deed of trust recorded by CitiBank in 1990, and they argue that ESB could not “foreclose on [its] junior hen, disregard the senior hens, and then contend that the latter were wiped out by the foreclosure.” 5 At the very least, appellants assert, there were “material facts in dispute as to whether the foreclosing hen was junior or senior to the judgment hens” that should have precluded summary judgment.

We agree with appellants that ESB must be deemed to have foreclosed under the 1998 deed of trust, because the 1990 deed of trust had been satisfied and released. However, we reject appellants’ assertion that ESB must be deemed to have foreclosed solely on its junior lien and to have waived subrogation.

Appellants’ reasoning is that the information that ESB provided in the various foreclosure sale notices implied that ESB intended to foreclose only on its junior lien, and that ESB should now be estopped from asserting otherwise. 6 They argue that the Notice of Foreclosure Sale — which stated a “balance owed” of $232,747.08 as of February 28, 2001, and a cure amount of $51,273.05 — was defective because the “sums stated in the Notice of Foreclosure as the ‘balance owed’ and ‘minimum balance to cure’ were not based on the *1235 $153,000 ESB paid to retire the CitiBank note or yearly interest [on that note] at 10.5%, but on the $168,000 principal of the ESB loan and yearly interest at 14.25%, with late fees and other charges applicable under the [1998] ESB note and trust.” 7

We discern nothing in the foregoing information from the foreclosure sale notice that is inconsistent with ESB having foreclosed on its priority hen. The only deed of trust on the 33rd Street property that ESB held was the 1998 deed of trust. Although a portion of the indebtedness to which the 1998 deed of trust related was subordinate (and another portion was superior) to the Pappas heirs’ judgment liens, see Pappas I, 829 A.2d at 960, that did not somehow revive the 1990 deed of trust. We see no reason why (and appellants point us to no authority for their contention that) ESB should have completed the “balance owed,” “interest rate” and “balance required to cure default” lines on the foreclosure forms by reporting anything other than the balance, interest rate and delinquency amounts under the 1998 ESB loan on which Vasiliki Pappas had defaulted. Vasiliki Pappas would have needed to cure the default on the 1998 note, by paying an amount subject to its 14.25% interest, in order to avoid the foreclosure sale, so the interest rate and cure amounts applicable to the 1998 note were the appropriate information to show on the foreclosure forms. 8 As to appellants’ complaint that the foreclosure sale notices “nowhere asserted the 1990 Citibank trust or any lien interest claimed as subrogated thereto,” the answer is that the applicable statute and regulation nowhere require that information. 9 Accordingly, we find no *1236 defects in the foreclosure sale notices that preclude ESB from asserting its priority lien with respect to the foreclosure sale proceeds.

Appellants rely on two cases from other jurisdictions, Kozanjieff v. Petroff, 215 Ind. 286, 19 N.E.2d 563 (1939), and Jack v. Wong Shee, 33 Cal.App.2d 402, 92 P.2d 449 (1939), for the proposition that a lienholder that forecloses on a subordinate or unsub-rogated lien forfeits its right to subrogation under a deed of trust. However, the eases do not stand for such a broad proposition and, in any event, do not support appellants’ contention that ESB waived its priority lien by describing in the foreclosure notices terms that related (in part) to its subordinate lien. Kozanjieff held only that a mortgagee who elected to levy on a judgment against a mortgagor by attaching the encumbered property, rather than to foreclose on the mortgage, “waived all the rights he might otherwise have had by virtue of the mortgage.” Id. at 567. The decision in Jack rested on California jurisprudence that “the right of subrogation ... is one which may be asserted only in a civil action” at which the released first-priority trust deed “would have been revived.” 92 P.2d at 453-54. The court held that because the mortgagor availed itself of the power-of-sale clause in the deed of trust instead of petitioning the court for a decree of subrogation, it waived its right of subrogation. Id. These cases are not relevant here, as ESB did not levy on a judgment, and there is no rule or practice in our jurisdiction that a lienholder forfeits a claim to priority of its lien under equitable principles if it forecloses without awaiting a judicial decree as to the priority of hens. See, e.g., American Century, 355 A.2d at 565 (a foreclosure sale of a property while competing lienholders were litigating the order of priority of their hens did not prevent the foreclosing lienholder from relying on the principle of equitable estoppel to establish the priority of its hen).

Appellants ask us to adopt such a rule, ie., that a priority hen based on equitable subrogation is enforceable only through a judicially-supervised foreclosure. 10 We dechne to do so, in part be *1237 cause such a rule — which could be implicated whenever a refinance-mortgage lender forecloses on a property that is subject to one or more other liens as well — would undermine the legislative policy to avoid imposing delays on mortgage foreclosures that could restrict the flow of mortgage money into the District. 11 Cf. G.E. Capital, 657 A.2d at 1174, 1178-79 (requiring a mortgagee successfully to litigate its right to equitable subrogation, as a prerequisite to invoking subrogation upon a foreclosure sale, “is at odds with the policy of Maryland law to expedite mortgage foreclosures”).

B. Appellants’ Due Process Argument

We also reject appellants’ arguments that non-judicial foreclosures are inconsistent with due process and that the April 3, 2001 foreclosure sale deprived them of due process. “ ‘[Mjost rights secured by the Constitution are protected only against infringement by governments’ and not private individuals.” Woodward & Lothrop v. Hillary, 598 A.2d 1142, 1145 n. 5 (D.C.1991) (quoting Flagg Bros. v. Brooks, 436 U.S. 149, 156, 98 S.Ct. 1729, 56 L.Ed.2d 185 (1978)). Only where a private actor’s conduct “may fairly be treated as that of the State itself’ can there be a violation of constitutional protections. Flagg Bros., 436 U.S. at 157, 98 S.Ct. 1729 (internal quotation and citation omitted). The Supreme Court has specifically held that a private entity’s efforts to pursue collection of a debt by private means that are permissible under a state law that “merely announce[s] the circumstances under which its courts will not interfere with a private sale” is not conduct that can be ascribed to a state. Id. at 166, 98 S.Ct. 1729. And, in Bryant v. Jefferson Fed. Savings & Loan Ass’n, 166 U.SApp. D.C. 178, 509 F.2d 511 (1974), the United States Court of Appeals for the D.C. Circuit rejected a constitutional challenge to extrajudicial mortgage foreclosure in the District (which was regulated by provisions then codified at D.C.Code § 45-615 (1973), and now codified at D.C.Code § 42-815 (2001)), reasoning that there is “no significant governmental involvement in the mortgage foreclosure practices.... ” Id. at 180, 509 F.2d at 513 (citing cases which have “uniformly rejected” attacks on analogous foreclosure statutes).

Appellees’ foreclosure activities were private debt collection activities conducted pursuant to the power-of-sale clause in the 1998 deed of trust. They did not constitute governmental action subject to due process requirements. 12

C. Appellants’ Notice Arguments

Appellants next argue that the foreclosure sale should be declared void because *1238 of appellees’ untimely mailing of the statutory foreclosure sale notices. They point to the facts that the substitute trustees sent notice of the April 3, 2001 sale to VasiliM Pappas and to Renee Fox (who had been the successor representative of the Aphrodite Pappas estate) only on March 16, 2001, in violation of the thirty-day notice requirement of D.C.Code § 42-815(b). They also complain that no notice was sent to them, the individual Pappas heirs, even though they had been named individually as defendants in the Pappas I litigation that was underway when the foreclosure sale was announced and held.

Appellants have no standing to challenge the timing of the notice to Vasi-liki Pappas. Not only do they cite no “injury to themselves fairly traceable to” the failure to notify her, Jones v. District of Columbia, 585 A.2d 1320, 1321 (D.C. 1990), but they also assert no interests that “fall within the zone of interests to be protected or regulated by the statute ... in question,” which is a prerequisite for standing. Community Credit Union Servs. v. Fed. Express Servs., 534 A.2d 331, 334 (D.C.1987) (internal quotation and citation omitted). In enacting the legislative provision now codified as D.C.Code § 42-815(b), Congress was concerned about homeowners—“particularly low-income homeowners ... who had been fraudulently tricked into giving second and third mortgages on their homes by a small number of unscrupulous merchants” and who “found that their homes were literally being sold from beneath them” without notice. Young v. Ridley, 309 F.Supp. at 1310. Nowhere did Congress indicate that the notice requirements of section 42-815(b) were intended to protect junior lien-holders.

Nor does the statutory language give appellants a basis for complaining about appellees’ failure to give them written notice of the foreclosure sale. D.C.Code § 42-815(b) requires notice only to the “owner” of the encumbered real property and to the District; there is no statutory or regulatory requirement that a foreclosing mortgagee give notice to competing lienholders, whether subordinate or superior. At oral argument, appellants’ counsel urged us to construe the statutory and regulatory mandate of timely notice of foreclosure sales to property “owners” to require that notice be given to anyone who is known to own an interest in the affected property, including junior lienholders. We note that the D.C. Circuit rejected a similar contention in S & G Inv., Inc. v. Home Fed. Savings & Loan Ass’n, 164 U.S.App. D.C. 263, 267, 505 F.2d 370, 374 (1974) (holding that a junior lienor was not entitled to notice of a foreclosure sale under D.C.Code § 42—815(b)). While we are not bound by the ruling in S & G, we find the court’s reasoning persuasive, because it is consistent with the more limited legislative intent discussed above.

There remains the question of whether, under equitable principles, appellants were entitled to more timely and adequate notice of the ESB foreclosure sale. The answer is found in the principle, discussed in our decision in Pappas I, that ESB was entitled to equitable subrogation to the extent that its assuming a priority position to the extent of the CitiBank refinancing did not harm or prejudice the holders of the prior-recorded liens. See 829 A.2d at 960-61; see also Annapolis Co. v. Wardman, 59 App.D.C. 321, 323, 41 F.2d 115, 117 (1930) (applying, in the context of a foreclosure sale under a deed of trust, the maxim that “he who seeks equity must do equity in the transaction in respect to which relief is sought”). Stated differently, by invoking equitable subrogation, ESB was obligated not to do anything in accomplishing the foreclosure sale that would leave the Pappas heirs in any worse position than they were in with respect to *1239 the CitiBank loan. With that principle in mind, we can dispose of appellants’ claims that they were entitled to more timely or more direct notice of the foreclosure sale than they actually had.

Had the CitiBank trust remained in place and had CitiBank foreclosed, appellants as junior lienholders would not have been entitled by law to notice of the foreclosure sale. See S & G, 164 U.S.App. D.C. at 267, 505 F.2d at 374; see also Scott v. Paisley, 271 U.S. 632, 635-36, 46 S.Ct. 591, 70 L.Ed. 1123 (1926) (the law imposes no obligation upon the holder of a deed of trust to notify one holding a junior lien of his intention to sell the property under the deed of trust). Nor does the record disclose any term of the CitiBank deed of trust or any agreement with CitiBank pursuant to which appellants would have been entitled to notice. All that equity appears to require is that appellants not be left in a worse position than they were in originally as a result of ESB’s priority position. 13 Accordingly, we conclude that appellants were not entitled to have notice from ap-pellees of ESB’s foreclosure sale.

Having sued the Pappas heirs individually, ESB certainly knew of their interests and, as a matter of civility if nothing else, perhaps should have caused the substitute trustees to mail notice of the foreclosure sale to each of them individually. 14 For that reason, we might be troubled by the result we reach above if we were persuaded from the record that appellants were left without adequate time to protect their interests in the 33rd Street property. However, the record persuades us that appellants had ample notice that a foreclosure sale was impending. Not only did their attorney have sufficient notice from whatever source (perhaps the notice to the former representative of the Aphrodite Pappas estate) to enable him to attend the April 3, 2001 sale; 15 but also, the record *1240 discloses, appellant Papageorge (and, presumably, the other appellants as well) knew of the foreclosure sale notice that ESB advertised sometime prior to February 4, 2000 — more than a year before the foreclosure sale actually took place — and of the delay related to Vasiliki Pappas’s bankruptcy. Appellants also had notice that ESB claimed priority as to a portion of its interest in the 33rd Street property. At the same time, they did not know the precise amount of ESB’s (claimed) priority lien. This knowledge of some relevant facts and uncertainty as to others should have given appellants ample warning to monitor the situation (e.g., for removal of the bankruptcy stay); ample reason to be on guard against potential ESB sale and bidding strategies; 16 ample time to act to prevent ESB’s foreclosure sale (such as by asking the court to enjoin the sale) or to move first to enforce their judgment hens; and ample time to prepare to bid competitively at a foreclosure sale, if that was their intent.

In sum, we find no basis to disturb the ESB foreclosure sale, the trial court’s holding that appellants’ liens were extinguished by the sale, or the grant of summary judgment to ESB.

So ordered.