Michaux, Roy H., Jr.

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Credit Transactions -- Mortgages -- Purchase by Life Tenant

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NORTH CAROLINA LAW REVIEWVolume 43 | Number 3 Article 94-1-1965Credit Transactions -- Mortgages -- Purchase byLife TenantRoy H. Michaux Jr.Follow this and additional works at: http://scholarship.law.unc.edu/nclrPart of the Law CommonsThis Note is brought to you for free and open access by Carolina Law Scholarship Repository. It has been accepted for inclusion in North Carolina LawReview by an authorized editor of Carolina Law Scholarship Repository. For more information, please contact law_repository@unc.edu.Recommended CitationRoy H. Michaux Jr., Credit Transactions -- Mortgages -- Purchase by Life Tenant, 43 N.C. L. Rev. 602 (1965).Available at: http://scholarship.law.unc.edu/nclr/vol43/iss3/9NORTH CAROLINA LAW REVIEWCredit Transactions-Mortgages-Purchase by Life TenantIn Morehead v. Harris,' a husband, joined by his wife, hadexecuted a deed of trust on two tracts of land as security for a loan.The husband died intestate with the debt outstanding. At a fore-closure sale pursuant to the terms of the deed of trust, the wifepurchased the property for an amount equal to the unpaid balance ofthe loan plus the cost of foreclosure. She received a deed from thetrustee purporting to vest in her a fee simple title to the property,which was worth considerably more than she had paid at the sale.The wife sold one tract of the property and devised the remainingtract to her sisters. Before her death, the children of her mortgagor-husband had begun litigation to recover both tracts of land. Ingranting a recovery to the children,' the North Carolina SupremeCourt held that the wife purchased the property to protect her dowerinterest and, as a life tenant, she held the excess above her life estatein one-third of the property as trustee for the remaindermen.3 Bydictum, the court stated that if the wife, as life tenant, had paidmore than her proportionate share, she would be a creditor of theestate for that amount.4 The case gives rise to two issues that meritdiscussion: can a life tenant ever purchase mortgaged property freeof trust and, when he cannot, how much of the purchase price canbe recovered from the remaindermen as the excess above the lifetenant's proportionate share?262 N.C. 330, 137 S.E.2d 174 (1964). The case had come before thecourt once before, but was remanded to the superior court because of an omis-sion of necessary parties. Morehead v. Harris, 255 N.C. 130, 120 S.E.2d425 (1961).2 This statement should be qualified in that a recovery was granted tothe children as opposed to the wife, but as to the tract conveyed by the wife,the court remanded for a new trial on the grounds that the purchasers ofthe property may be in the position of bona fide purchasers for value andthat the children had done nothing to protect their title. 262 N.C. at 344,137 S.E.2d at 187.'The wife was also the administratrix of the husband's estate, and thecourt said that she was acting in a fiduciary capacity. It was stated thatwhen the fiduciary purchased at his own sale, he was a "trustee for tilebenefit of the estate to prevent loss to the estate." Id. at 336, 137 S.E.2dat 180. Even though the wife did not purchase at her own sale (since thissale was conducted by the trustee and not the administratrix of the estate),the rule was said to apply. However, this reasoning is not important sincethe trust would have been implied even if the wife had not been the ad-ministratrix.'Id. at 336, 137 S.E.2d at 181.[Vol. 43NOTES AND COMMENTSNorth Carolina seems to be within the majority rule5 that thelife tenant becomes a trustee for the remaindermen when he pur-chases directly at the foreclosure sale.6 However, the court makes adistinction where the life tenant purchases from a third party whobought at the sale. In an earlier North Carolina case,7 a wife hadexecuted a deed of trust to secure a loan. After her death, herhusband, a life tenant by curtesy, allowed a foreclosure. 8 The landwas purchased by a stranger who, on the same day, transferred thetitle to the husband for a consideration equal to the purchase price.When the children of the wife sought to recover the property, thecourt held that no trust was implied absent a jury finding of fraudor that the stranger acted as agent for the husband. Therefore, thehusband received a valid fee simple title to the property.In considering the rationale and policy in the cases imposing atrust on the life tenant, there seems to be justification for differentresults when the life tenant purchases directly at foreclosure andwhen he purchases from a third person. It is clear that any personclaiming an interest in the property under the intestate mortgagormay redeem the property until foreclosure, at which time the re-' Bullock v. Peoples Bank, 351 Mo. 587, 602, 173 S.W.2d 753, 759 (1943) ;Tindall v. Peterson, 71 Neb. 160, 98 N.W. 688 (1904); MaGee v. Carter,31 Tenn. App. 141, 148-49, 212 S.W.2d 902, 906 (1948). In Tindall, thewife of the mortgagor resigned as administratrix of his estate and purchasedthe property at the foreclosure sale. Without calling it a trust, the courtheld that she protected her life interest and the interest of the remaindermen.'See Farabow v. Perry, 223 N.C. 21, 25 S.E.2d 173 (1943); Creech v.Wilder, 212 N.C. 162, 193 S.E. 281 (1937).1 Miller v. Marriner, 187 N.C. 449, 121 S.E. 770 (1924).'Even though the life tenant holds the property as trustee for the re-maindermen, there are times when the life tenant is justified in allowinga foreclosure on the deed of trust which will terminate the rights of theremaindermen in the property. It has been established in North Carolinathat the life tenant is only liable to pay the interest on the encumbrance forthe duration of the period in which the interest was due, and then only tothe extent of the amount of "rent or actual value" received from the property.Therefore, the life tenant is not a trustee for the remaindermen in that hehas to pay the interest to prevent a foreclosure under any circumstances.Id. at 455, 121 S.E.2d at 773. See also Williams v. Williams, 120 So. 2d202 (Fla. 1960).o In addition to the situation where the third party is acting as agentfor the life tenant or there is fraud, it has been stated that the implied trustwill also arise where there is an agreement between the life tenant andthe third party that the life tenant provide an opportunity for the remainder-men to reimburse him and claim their interests. Clark v. Cantwell, 40 Tenn.202 (1859).1965]NORTH CAROLINA LAW REVIEWdemption rights are cut off.10 It is also clear that the wife holds adower right in the equity of redemption, the interest remaining inher mortgagor husband." Since the wife is entitled to redeem theproperty before foreclosure, she is in an advantageous position toprotect her dower interest from outside purchasers ;12 in saving suchinterest, she also protects the remaindermen from losing their rightsin the property."8 Therefore, if the wife does not redeem and is justi-fied in allowing a foreclosure,' 4 the courts will not allow her to bidin and purchase the property at a price below the fair value to thedetriment of others claiming from the husband's estate. 5 In otherwords, she cannot obtain through a foreclosure purchase any estate inthe property greater than she would obtain through redemption, andany attempt to do so will be barred by the court through impositionof a trust.Aside from the fact that the life tenant will not usually be ableto purchase at a price below the fair market value of the propertywhen he buys from a third party who took under the foreclosuresale,'6 the main reason for allowing him to do so is that there is nodetriment to the remaindermen. As previously stated, any personclaiming under the intestate mortgagor has the power to redeem.' 7If the life tenant is justified in allowing a foreclosure, the rights ofthe remaindermen are cut off and there is no reason why the subse-quent purchase by the former life tenant should be deemed to pro-tect the interests of the remaindermen whose claims to the propertyare lost through their own inaction.Assuming that the dowress does purchase at a foreclosure salegiving rise to an implied trust, or redeems the property in whichcase the mortgagee is entitled to the full amount of the encum-10 Brown v. Jennings, 188 N.C. 155, 124 S.E. 150 (1924); I SCRIBNER,DowFa 461 (1867)." Gay v. J. Exum & Co., 234 N.C. 378, 67 S.E.2d 290 (1951), 30 N.C.L.Rxv. 310.1" The heirs could also redeem at any time before foreclosure if they werefinancially in a position to do so. See note 10 supra and accompanying text.18 Brown v. Jennings, 188 N.C. 155, 124 S.E. 150 (1924).1, See note 8 supra and accompanying text."For this basic proposition, see Tindall v. Peterson, 71 Neb. 160, 98N.W. 688 (1904) ; Miller v. Marriner, 187 N.C. 449, 456, 121 S.E. 770, 774(1924).1" Of course, the person bidding in at the foreclosure sale may not alwaysbe able to purchase the property for the amount of the encumbrance, butthis was the case in both Morehead and Miller v. Marriner, supra note 15." See note 10 supra and accompanying text.[Vol. 43NOTES AND COMMENTSbrance,'8 is she entitled to recover anything from the remainder-men for protecting their interests? North Carolina is in accordwith the majority rule'9 that the wife is entitled to recover reim-bursement from the remaindermen who wish to claim their interestin the property." However, in using the language "if the lifetenant pays more than his proportionate share, he simply becomes acreditor of the estate for that amount," 2 1 the court in Moreheadleft two questions open: of whose estate is the life tenant a creditorand what is the "proportionate share" of the life tenant that mustbe determined to decide how much reimbursement he is entitled to?In tracing the authority cited by the court, it is clear that thelife tenant paying the encumbrance redeems from the mortgageean interest in excess of the life estate and is subrogated to the rightsof the mortgagee against this interest.2 2 Moreover, the life tenant,having paid an obligation of the mortgagor, is entitled to a claimagainst his estate for the proportion of the amount paid by himfor the interest beyond the life estate.2As to a determination of the "proportionate share" of the wife," McCabe v. Bellows and Another, 73 Mass. 148 (1856). However,there are certain situations in which the wife does not have to pay the fullamount of the encumbrance in order to get her dower allotment in the prop-erty. If the holder of the mortgage does not wish to enforce payment of theprincipal, the wife may be allowed to continually contribute an amount to themortgagee which is sufficient to pay one-third of the yearly interest on theamount due. Bell v. Mayor &c. of New York, 10 Paige 49 (N.Y. 1843).Where the heirs of the deceased mortgagor have redeemed, the widowmust make contribution to them "in proportion to the value of her life estatein one-third of the property" in order to redeem such life estate. Swaine v.Perine, 5 Johns. Ch. R. 482 (N.Y. 1821)." Murphy v. May, 243 Ala. 94, 8 So. 2d 442 (1942) ; In re Daily's Estate,117 Mont. 194, 159 P.2d 327 (1945); 2 WASHBuRN, REAL PROPERTY § 1142(6th ed. 1902). However, it should be noted that the remaindermen maynot be compelled to contribute because he may feel that it is in his bestinterest not to have the property redeemed. Of course, the remaindermancannot claim his interest free of the mortgage without contributing hisproportionate interest. I SCRIBNER, DowEa 461 (1867).2 Farabow v. Perry, 223 N.C. 21, 25 S.E.2d 173 (1943); Creech v.Wilder, 212 N.C. 162, 193 S.E. 281 (1937).21262 N.C. at 336, 137 S.E.2d at 181."Whitney v. Salter, 36 Minn. 103, 30 N.W. 755 (1886); Keller v.Fenske, 123 Wis. 435, 101 N.W. 378 (1904). It has also been held thatthe wife of the mortgagor husband can redeem the property before thedeath of the mortgagor husband since she has an interest, although inchoate,in the equity of redemption and can recover reimbursement from the estatebecause her position is analogous to that of a surety for her husband.Fitcher v. Griffiths, 216 MAss. 174, 103 N.E. 471 (1913)." Whitney v. Salter, supra note 22; Keller v. Fenske, supra note 22.1965]NORTH CAROLINA LAW REVIEWhowever, the authority does not lead to a specific conclusion andthe North Carolina court has never decided the question. A reviewof the case law from other jurisdictions reveals two different viewsin determining the amount of reimbursement which the life tenantis entitled to recover from the remaindermen exercising their rightsto the property. In an early Maine case,4 the wife's allotted dowerincluded an entire mortgaged tract giving her a life estate in thewhole mortgaged premises instead of just one-third of it. The courtstated that after payment of the encumbrance on the mortgagedtract by the wife she would hold for her life, and at her death, theremaindermen could claim their interests by paying the wife's estatethe full amount paid by her in extinguishing the debt." Such aresult raises two interesting points: the wife is not entitled to anyreimbursement during her life, and when reimbursement is made,the wife's estate is not held responsible for the value of the useof the land during her life since at the time of the reimbursementthe remaindermen get the entire property. On the other hand, theNew York court2" discussed the more usual case in which the wife'sdower was a life estate in one-third of the mortgaged premises.Having paid the full amount of the encumbrance on the entireproperty, it was decided that the wife was required to contributethe present value of an annuity attributable to her life estate inone-third of the property and could only recover the excess paidfrom the remaindermen. The annuity for which the wife was re-sponsible was determined by multiplying one-third of the yearly in-terest on the sum unpaid at the death of the husband by the numberof years in the wife's life expectancy."' In contrast to the Maineview, the New York view holds the wife, as between her and theremaindermen, responsible for her proportional part.In referring to a "proportionate share" in Morehead, the courtseems to indicate that proportionate contribution would be requiredfrom the life tenant, thus following the New York view; it is pos-sible that the New York court's method of determining the pro-portion to be paid by the dowress and the remaindermen would alsobe followed. If no interest were due on the loan to the mortgagor," Wilkins v. French, 20 Me. 111 (1841)."Id. at 119."House v. House, 10 Paige 158 (N.Y. 1843).Id. at 165. Accord, Tindall v. Peterson, 71 Neb. 160, 98 N.W. 688(1904).[Vol. 43NOTES AND COMMENTSas appears to be the case in Morehead, there may be nothing uponwhich to base the wife's proportionate share under the annuity prin-ciple. However, under such circumstances, it seems that the wife'sproportion of the mortgage obligation could be derived by usingthe proportion that the cost of an annuity,2 8 equal to the value ofthe use of one-third of the property for the period of the wife's lifeexpectancy, bears to the whole value of the property.Even with the abolition of dower under the present intestatelaw,29 it is still possible for the Morehead situation to arise. Underthe election provision,80 if the widow of an intestate chose to becomea life tenant in one-third of the mortgagor-husband's estate, the sameproblem of proportionate payment would arise. Absent an elec-tion, when the husband dies intestate the widow now receives a por-tion of his property in full fee, her share depending on the numberof children surviving him.8" Of course, her portion of the propertywould be subject to the mortgage; in order to free the property fromdebt, she may still be required to pay the full amount of the encum-brance.32 In doing so, the wife would also be paying the debt onthe portion going to the other heirs of the intestate, and she wouldbe able to hold the property as security until she was reimbursed.88If the other heirs decided to exercise their rights to their portionof the property, she would then be able to recover from them theamount of the debt attributable to such portion plus interest. Therewould be no problem of evaluating the proportion which should bepaid by the holder of a life estate.Roy H. MICHAUX, JR.'8 For a determination of one's life expectancy, see the mortuary table inN.C. GEN. STAT. § 8-46 (Supp. 1963). To calculate the present value ofan annuity based on one's life expectancy under the mortuary table, see N.C.GEN. STAT. § 8-47 (Supp. 1963)."' N.C. GEN. STAT. § 29-4 (Supp. 1963)."o N.C. GEN. STAT. § 29-30 (Supp. 1963)."1N.C. GEN. STAT. § 29-14 (Supp. 1963)." See note 17 supra and accompanying text."II JONES, MORTGAGES § 1364 (8th ed. 1928); 2 WASHBURN, REALPROPERTY § 1142 (6th ed. 1902).1965]

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Credit Transactions -- Mortgages -- Purchase by Life Tenant

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