Southern Maryland Oil, Inc. v. Kaminetz

Barnes, J., delivered the opinion of the Court. In this appeal, the appellant, Southern Maryland Oil, Inc. (Southern or Lessee), contends that the Circuit Court for St. Mary’s County (Dorsey, C.J.) erred in sustaining a demurrer to Southern’s exceptions to the ratification of a sale under a mortgage on certain land of Harry S. Lancaster and Mary A. Lancaster (Mortgagors or Lessors) containing 17,250 square feet and located on Maryland State Road No. 325 in St. Mary’s County (the subject property) and in finally ratifying the sale. Southern’s exceptions allege that it is the lessee in possession of the subject property under a Lease and Agreement dated March 23, 1963, between the Lancasters as lessors and Southern as lessee. On the same day that the Lancasters entered into the Lease and Agreement, they had acquired the subject property from Frances L. Hardin, widow (Hardin).

The deed consummating the sale was recorded on March 27, 1963. A mortgage securing a loan of $15,080.00 from the Lancasters to The Augusta Building and Loan Association, Inc. (Augusta) was recorded later on the same day. The Lease and Agreement was also recorded on March 27, 1963, but subsequent to the recordation of the mortgage. When the subject property was conveyed by Hardin to the Lancasters on March 23, 1963, Hardin, the Grantor, owned the adjacent property on which was located an artesian well.

As part of the consideration for the purchase price paid Hardin by the Lancasters, Hardin agreed to provide the Lancasters for a period of 25 years from the date of the deed a sufficient and adequate water supply from the artesian well for the improvements “now or to be hereafter constructed” on the subject property. ⁴⁴⁶ Ever since March 23, 1963, the Lessee has received the water supply for its filling station operation on the demised premises from the adjacent property. The Lease and Agreement provided, inter alia, that the Lessee “shall have the first right of refusal to purchase same [the demised premises] at the price and on the terms and conditions which the lessors have elected to sell,” provided the right is exercised as provided in Paragraph 9 of the Lease and Agreement. By a deed dated February 5, 1968, and duly recorded, the Lancasters conveyed to J. Lawrence Millison, the reversionary interest in the subject property as well as the adjacent parcel of land on which the artesian well is located. This conveyance was subject to the lien of the balance due on the mortgage as well as the leasehold interest of the Lessee, but the sale was in violation of the first refusal option of the Lessee, which has not been waived.

On April 1, 1968, Millison closed the valve on the water line supplying the filling station operation of the Lessee on the subject property. The Lessee made demand on Millison to restore the water supply; and upon his refusal, the Lessee filed a proceeding in equity in the Circuit Court for St. Mary’s County, No. A-3095 Equity, against Millison. That court on April 9, 1968, issued a writ of injunction against Millison enjoining and restraining him from directly or indirectly interfering with the free flow of water from the artesian well on his property to supply the leasehold operation of the Lessee on the subject property. This injunction is still in full force and effect.

The equity proceeding is still pending, the answer of Millison having been filed on July 9,1969. The Lessee has fully complied with all terms and conditions of the Lease and Agreement since Millison’s acquisition of the reversionary interest in the subject property and has paid the rent promptly to Millison or his attorney but always under protest and without prejudice to its first refusal option to purchase the reversionary interest. ⁴⁴⁷ Millison appears to have paid promptly the monthly installments on the mortgage from April 1968 until a short time before the present foreclosure proceeding was docketed and until a recent appearance in court in Equity No. A-3095 when he was unable to have the injunction vacated and was informed by letter that unless the first refusal option of the Lessee to purchase the subject property could be resolved promptly, a proceeding would be filed to set aside the deed of February 5, 1968, from the Lancasters to Millison. Millison’s attorney by letter of August 20, 1969, received August 23, first informed the Lessee, Southern, of the foreclosure proceeding under the mortgage, the public sale being scheduled for August 26, 1969 [The foreclosure suit was filed on August 6,1969.]. The Lessee promptly communicated with the attorneyassignee [the appellee, Marvin S. Kaminetz, AttorneyAssignee for the purpose of foreclosure by assignment of Ralph Chesser, to whom the mortgage had been assigned by Augusta on July 9, 1969] and offered to settle the balance due on the mortgage obligation in full, with accrued interest and costs, in consideration of an assignment of the mortgage to the Lessee, but this tender was promptly declined; “that this circumstance, together with the facts herein alleged and documented confirms that J. Lawrence Millison defaulted on the aforesaid mortgage obligation to conspire, encourage or acquiesce in the foreclosure thereof only in an effort to destroy the leasehold interest” of the Lessee.

In the exceptions it was prayed that (1) the sale reported by the attorney-assignee on September 5, 1969 [showing a purchase by Chesser for $35,000, he being the highest bidder] be set aside and not ratified; (2) the foreclosure proceedings be dismissed and the attorneyassignee be directed to withdraw the mortgage and note, the assignment for the purpose of foreclosure be rescinded and cancelled, and the mortgagee be directed to transfer by assignment to the Lessee, Southern, all of his right, title and interest therein upon payment of the prin ⁴⁴⁸ cipal due plus interest and court costs, advertising costs of the foreclosure proceedings and a reasonable fee (but not commissions) of the attorney-assignee to the date of sale and (3) the Lessee have other and further relief. The report of sale in the foreclosure proceedings was filed on September 5, 1969, and ratified nisi on that day, unless cause be shown on or before October 6, 1969. The purchaser Chesser filed his affidavit on September 29, 1969, “that he purchased the subject property as principal and not as agent for anyone else, that he nor anyone connected with him directly or indirectly discouraged anyone from bidding on said property.” The exceptions of the Lessee were filed on October 6,1969. Counsel for the purchaser Chesser entered his appearance on October 9, 1969; and on October 15 both the attorney-assignee and the purchaser filed a demurrer to the exceptions on several grounds including that (1) there was no allegation that the lease is a prior lien to the mortgage and in fact the lease is subordinate to the mortgage; (2) the water rights mentioned in the exceptions were previously granted by the Lancasters by the mortgage; (3) there was no allegation of any duty by the attorney-assignee to accept the Lessee’s offer to purchase the mortgage; (4) there was no allegation that the purchaser had violated any legal duty to the Lessee or that the sale was conducted unfairly or was improper in any other respects as regards the purchaser; (5) there was no allegation that the Exceptant (the Lessee, Southern) had any interest in the proceeds of sale and, therefore, no standing to file exceptions; and (6) that pursuant to Code (1957), Art. 66, § 20 the Exceptant had no valid claim whatever against the purchaser and the lease is not valid against the purchaser.

After argument and the consideration of legal memoranda filed by counsel for the parties, Chief Judge Dorsey filed a written opinion on March 18, 1970, indicating that inasmuch as the lease was subordinate to the mortgage, the demurrer should be sustained. The sale was ⁴⁴⁹ finally ratified on March 25, 1970, and a timely appeal was taken to this Court. The appellant, Southern, raises four contentions before us, i.e., that (1) it was a party in interest entitled to except to the sale, (2) priority as between the mortgage and the lease is not the controlling issue on the demurrer, (3) the allegations of the exceptions and facts before the lower court at the hearing required an overruling of the demurrer to the exceptions, and (4) the foreclosure sale was irregular and not in conformity with the Maryland Rules of Procedure. We will consider these contentions in the order indicated.

(1) The appellees earnestly contended in the lower court and before us that inasmuch as Southern, as lessee, had no interest in the proceeds of the sale, it had no standing to file the exceptions in the case. In our opinion this is too narrow a position. Generally speaking, in order to have status to file exceptions to a sale in a mortgage foreclosure suit, the exceptant, other than a purchaser, must have an interest in the proceeds of sale as mortgagor or as claiming through the mortgagor — see Righter v. Clayton, 173 Md. 138 , 194 A. 819 (1937) — or the exceptant may have an interest in the property sold which may be adversely affected by the sale, either illegally or improperly made. See Shaw v. Smith, 107 Md. 523, 526 , 69 A. 116, 118 (1908), Cf.

Bentley v. Beacham, 91 Md. 677 , 47 A. 1024 (1900). See also Ginsberg and Ginsberg, Mortgages and Other Liens, p. 334 (1936). Southern makes no allegation or contention that it has any interest in the proceeds of sale. Its allegations and contentions are that it has an interest in the mortgaged property as tenant under the recorded lease of March 23, 1963, which will be adversely affected if the sale is finally ratified.

It appears from the allegations of the exceptions and from the Lease and Agreement itself that Southern did have an interest in the mortgaged property, even though this interest would be destroyed if the sale ⁴⁵⁰ were finally ratified in view of the law that the title of the purchaser on final ratification will be that of the mortgagors prior to the recordation of the Lease and Agreement as we will point out later in this opinion. If, however, Southern, as lessee, were able to allege and prove a proper ground for preventing the foreclosure of the mortgage because of possible fraud or estoppel, the foreclosure sale would not be finally ratified and Southern’s interest in the property would continue. When the purchaser at the foreclosure sale is the mortgagee or his assignee, the Courts will examine the sale closely to determine whether or not it was bona fide and proper. The Courts will set aside such a sale upon “slight evidence of partiality, unfairness or a want of the strictest good faith.” Heighe v. Evans, 164 Md. 259, 270 , 164 A. 671, 676 (1933).

In short, there is a distinction between being a proper person to file exceptions at all and the merits of the exceptions themselves when filed; the difference in result is between a dismissal of the exceptions for lack of standing to file them and an overruling of the exceptions as not having been alleged and proved on their merits. In our opinion, the present case falls within the latter class; and Southern was entitled to file the exceptions. (2) and (3) Southern contends that priority as between the mortgage and the lease is not the controlling issue on the demurrer and, further, that the allegation of the exceptions and facts before the lower court at the hearing required an overruling of the demurrer. These two contentions are interrelated and we will consider them together.

Our predecessors in Northrop v. Beale, 170 Md. 439 , 184 A. 900 (1936) indicated their disapproval of the use of a demurrer to exceptions filed to a report of sale or to an auditor’s report. Judge (later Chief Judge) Sloan stated for the Court: “A report of sale is not a pleading, nor is an exception to such a report, and we know of no rule by which the legal sufficiency of such an ⁴⁵¹ exception must be raised by a demurrer. The legal sufficiency of an exception to a sale or an auditor’s report can be decided without a formal answer; the exception itself raises and submits the question. The failure to file a formal answer cannot result in a judgment or decree by default in favor of the exceptant.

If the exception presents a question of fact, an answer may be required, but, whether an answer be filed or not, matters of fact in exceptions to reports of