Buying a property with preexisting deed of trust

United States 9th Circuit Court of Appeals Reports

Unpublished

THOMPSON v. CANTWELL, 05-35969 (9th Cir. 1-5-2007) BRENT THOMPSON; SYLVIA THOMPSON, Trustee Under Declaration of Trust, Plaintiffs-Appellants, v. ROSELYN N. CANTWELL, aka Roselyn N. Martin, Defendant, and RICHARD L. HANDLER; MARGARET M. HANDLER; JESSE L. ALEXANDER; NANCY W. ALEXANDER; THOMAS R. BURT, Defendants-Appellees. Nos. 05-35969, 04-36157; D.C. Nos. CV-01-03108-HO, CV-01-03108-HO. United States Court of Appeals, Ninth Circuit. Argued and Submitted November 13, 2006. Portland, Oregon. January 5, 2007.

[EDITOR’S NOTE: This case is unpublished as indicated by the issuing court.] MEMORANDUM[fn*]

[fn*] This disposition is not appropriate for publication and may not be cited to or by the courts of this circuit except as provided by 9th Cir. R. 36-3.

Appeal from the United States District Court for the District of Oregon Michael R. Hogan, Chief District Judge, Presiding.

Before: FERGUSON, O’SCANNLAIN and FISHER, Circuit Judges.

Brent Thompson, on behalf of the Thompson Family Trust
(collectively “Thompson”), purchased property in Medford,
Oregon, from defendants subject to a preexisting note and
trust deed and pursuant to an agreement that defendants
would pay off the debt. After defendants failed to pay,
Thompson paid off the debt and took an assignment of the
trust deed and note. Thompson now appeals the district
court’s entry of summary judgment against him, arguing that
the district court improperly found a merger because a
dispute of fact remained regarding whether he received a
discount on the property’s purchase price in consideration
of it being taken subject to the preexisting debt. Thompson
also argues that the district court erred by failing to
apply the anti-merger clause in the deed of trust, by
finding that the debt had been extinguished through payment
prior to the assignment and by awarding attorney’s fees.
Reviewing de novo, see `Ilio `ulaokalan Coal. v. Rumsfeld,
464 F.3d 1083, 1093-94 (9th Cir. 2006); Tutor-Saliba Corp.
v. City of Hailey, 452 F.3d 1055, 1059-60 (9th Cir. 2006),
we hold that there was a merger under Oregon law and that
because the merger did not void the contract, note or deed
of trust, the district court properly awarded fees.
Accordingly, we affirm.

In Baxter v. Redevco, Inc., 566 P.2d 501, 504 (Or. 1977),
the Oregon Supreme Court held that when a real estate
purchaser buys property subject to a preexisting deed of
trust, “his bargain include[s] as a part of the price the
amount of the note and [deed of trust].” Id. Moreover,
“`[w]here such a grantee takes an assignment of the
mortgage, as a general rule the debt secured by the
mortgage is held to be extinguished and personal liability
on it cannot be enforced.'” Id. (quoting George E. Osborne,
Handbook on the Law of Mortgages § 274, at 555 (2d
ed. 1970)). Such merger occurs “`without regard to [the
grantee’s] intention.'” Id. (quoting Osborne § 274,
at 551). We reject Thompson’s argument that the existence
of a discount is a factual issue to be decided by the
factfinder if it is in dispute. Under Baxter, the grantee’s
purchase of the mortgage results in a merger as a matter of
law, without regard to the intent of the grantee and without
regard to the value of the property. Id. at 504.

Thompson argues that Baxter’s calculations of the price of
the property as compared to the magnitude of the debt that
encumbered it demonstrate that discount was an issue of
fact. See id. at 504 n. 2 (noting that “the plaintiff did
take into consideration the $6,000 note and second trust
deed when he computed the amount that he would pay Rosbach
for the property”). We disagree. In doing so the court was
merely illustrating that there had been a discount. The
court did not suggest that the existence of a discount is
an issue of fact that must be proven as a prerequisite to
merger.

The anti-merger clause in the deed of trust did not
preclude the merger. Even if we were to assume that the
clause covered Thompson, the clause nonetheless would
merely be evidence of Thompson’s intent regarding merger.
Baxter’s conclusion that intent is irrelevant in a case
such as this one thus controls. See id. at 504.

Finally, we agree with the district court that the merger
did not prevent Thompson from enforcing the attorney’s fees
clauses in the sale agreement, deed of trust and promissory
note. Thus, by operation of Or. Rev. Stat. §
20.096(1), defendants could seek fees under the clauses. As
stated in Baxter, the effect of merger is that “`the debt
secured by the mortgage is held to be extinguished and
personal liability on it cannot be enforced.'” 566 P.2d at
504 (quoting Osborne § 274, at 555). Furthermore,
“if the grantee paid the amount of the debt for the
assignment, the mortgagor should be able to insist that it
constituted payment of the debt rather than purchase of
it.” Id. Thus the effect of merger is that the debt is
discharged, not — as Thompson contends — that
the underlying contracts are deemed void or rescinded. The
attorney’s fees clauses accordingly survived the merger.

AFFIRMED.

FERGUSON, Circuit Judge, dissenting:

The majority holds that a merger has occurred as a matter
of law regardless of the parties’ intentions. I
respectfully dissent.

In Baxter v. Redevco, Inc., 566 P.2d 501, 504 (Or. 1977)
(citation omitted), the case upon which the majority
relies, the Supreme Court of Oregon reiterated the
following general rule: “Where the owner of premises
acquires an outstanding mortgage thereon, his intention is
the controlling factor as to whether there is a merger.”
See also South Beach Lumber Corp. v. Swank, 311 P.2d 1018,
1023 (Or. 1957); Lothstein v. Fitzpatrick, 138 P.2d 919,
924 (Or. 1943); Barber v. Hartley, 298 P. 226, 229-30 (Or.
1931); Katz v. Obenchain, 85 P. 617, 620 (Or. 1906); Watson
v. Dundee Mortgage & Trust Inv. Co., 8 P. 548, 552-53 (Or.
1885). The court carved out an exception where the
mortgagor had sold the property at a discount[fn1] and the
purchaser-owner had assumed payment of the mortgage; in
that case, when the purchaser-owner later acquired the
mortgage, the debt and security interest merged, regardless
of the purchaser-owner’s intent. Baxter, 566 P.2d at 504 &
n. 2.

This exception to the general rule does not apply here,
where the grantor expressly agreed to pay the debt, and
there exists a dispute of fact as to whether the purchase
price included a discount. The Baxter court assumed a fact
pattern in which “[the grantee’s] bargain included as part
of the price the amount of the mortgage debt.” Id. at 504
(quotation omitted). The court further explained, “having
deducted this debt from the purchase price he paid, the
grantee cannot now require the mortgagor to pay the debt or
any part of it.” Id. at 505 (quotation omitted).

The Oregon Supreme Court never addressed the issue of
whether intent is relevant to merger where the grantor
expressly agreed to pay the mortgage debt and the fact of a
discount is disputed. Baxter therefore does not dictate the
outcome, and our task is to “predict how the highest state
court would decide the issue using intermediate appellate
court decisions, decisions from other jurisdictions,
statutes, treatises, and restatements as guidance.” S.D.
Meyers, Inc. v. City & County of S.F., 253 F.3d 461, 473
(9th Cir. 2001) (quotation omitted).

Other decisions, treatises, and the relevant restatement
all indicate that there should be no merger, because it
would contradict the clearly expressed intent of the
parties.[fn2] First, the very treatise upon which Baxter
relied specifies that where the mortgagor was bound by
agreement with the owner to pay off the debt, whether there
is a merger depends on the intent of the owner. See George
E. Osborne, Handbook on the Law of Mortgages § 274,
at 554 (2d ed. 1970) (stating that contract claim survives
assignment of mortgage and that availability of merger
defense depends on intent); see also 1 Grant S. Nelson &
Dale A. Whitman, Real Estate Finance Law § 616, at
590 (4th ed. 2002). Additionally, other treatises on
property and mortgages explain that the rigid common law
doctrine of merger is practically extinct;[fn3] it is
well-settled that the modern doctrine depends on the
intentions of the parties, and courts still will not apply
it when merger would work an injustice or violate
principles of equity. 28 Am. Jur. 2d Estates § 425
(2006); 31 C.J.S. Estates § 130 (2006); 55 Am. Jur.
2d Mortgages § 1342 (2006); 59 C.J.S. Mortgages
§§ 361, 444, 448 (2006). Finally, other courts
have supported this view and disfavored mergers generally.
See, e.g., Factors’ & Traders’ Ins. Co. v. Murphy, 111 U.S.
738, 743-44 (1884); The Bergen, 64 F.2d 877, 880 (9th Cir.
1933); Kolodge v. Boyd, 105 Cal. Rptr. 2d 749, 759
(Cal.Ct.App. 2001); Dunkum v. Macek Bldg. Corp., 176 N.E.
392, 394 (N.Y. 1931). Given the Oregon Supreme Court’s long
history of ruling that merger may occur only in conformance
with parties’ intentions; given that the anti-merger clause
in this case clearly expressed the parties’ intent to avoid
any merger; given the secondary sources indicating that
merger would not apply where the mortgagor is obligated by
agreement to pay the debt and the purchase price was not
discounted; and given the case law demonstrating that
merger is generally disfavored, I believe Oregon’s highest
court would find no merger.

I therefore respectfully dissent.[fn4]

[fn1] The majority suggests that the discount in Baxter was
merely incidental, but the Oregon Supreme Court’s opinion
is more accurately read as treating the discount as a fact
essential to its holding. Baxter, 566 P.2d at 504 & n. 2.

[fn2] The trust deed in this case included an explicit
anti-merger clause, which read as follows: “Merger-There
shall be no merger of the interest or estate created by
this deed of trust with any other interest or estate in the
property at any time held by or for the benefit of lender
in any capacity without the written consent of lender.”

[fn3] The Third Restatement of Mortgages provides a detailed
history of the doctrine of merger and explains that merger
does not apply. See Restatement (Third) of Property:
Mortgages § 8.5 cmt. a, c (1997) (“The one situation
in which an owner can sue another to recover a payment of
the obligation is where the owner acquires title subject to
the mortgage but pays the full purchase price for the
property.”).

[fn4] Because I would find that the defendants have not
prevailed, I also dissent from the court’s conclusion that
the District Court properly awarded attorneys’ fees to the
defendants.